-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VHUZKu/EzNQLgZrlVkuIfxsSHbKOXZ70L6ICKh1L4d42UI706H1PitkLAYydGnTN UTa1omttUza7ImNbqspzyg== 0000950134-02-006414.txt : 20020529 0000950134-02-006414.hdr.sgml : 20020529 20020529172237 ACCESSION NUMBER: 0000950134-02-006414 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELEN OF TROY LTD CENTRAL INDEX KEY: 0000916789 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC HOUSEWARES & FANS [3634] IRS NUMBER: 742692550 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14669 FILM NUMBER: 02665177 BUSINESS ADDRESS: STREET 1: CLARENDON HOUSE STREET 2: CHURCH STREET CITY: HAMILTON BERMUDA STATE: D0 ZIP: - BUSINESS PHONE: 915-225-8000 MAIL ADDRESS: STREET 1: ONE HELEN OF TROY PLAZA CITY: EL PASO STATE: TX ZIP: 79912 10-K 1 d97329e10vk.txt FORM 10-K FOR FISCAL YEAR END FEBRUARY 28, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 Commission file number 001-14669 HELEN OF TROY LIMITED (Exact name of the registrant as specified in its charter) BERMUDA 74-2692550 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CLARENDON HOUSE CHURCH STREET HAMILTON, BERMUDA (Address of Principal Executive Offices) 1 HELEN OF TROY PLAZA EL PASO, TEXAS 79912 (Registrant's United States Mailing Address) (Zip Code) Registrant's telephone number, including area code: (915) 225-8000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK - $.10 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 17, 2002 was $340,052,483. As of May 17, 2002 there were 28,211,017 shares of Common Stock, $.10 Par Value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Company's definitive proxy statement, which is to be filed under the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on February 28, 2002, are incorporated by reference into Part III hereof. Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Securities and Exchange Commission as part of this Form 10-K. Index to Exhibits - Page 54 TABLE OF CONTENTS
PAGE PART I Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 PART III Item 10. Directors and Executive Officers of the Registrant 48 Item 11. Executive Compensation 48 Item 12. Security Ownership of Certain Beneficial Owners and Management 48 Item 13. Certain Relationships and Related Transactions 48 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 49 Signatures 52
i PART I ITEM 1. BUSINESS GENERAL Unless the context requires otherwise, references to "the Company," to "our Company," or to "Helen of Troy" and references such as "we" and "us" refer to Helen of Troy Limited and its subsidiaries, including Tactica International, Inc.("Tactica"). Our Company is comprised of three operating segments. The North American segment sells hair care and other personal care and comfort appliances, hairbrushes, combs, and utility and decorative hair accessories in the U.S. and Canada. The International segment sells hair care and other personal care and comfort appliances, hairbrushes, combs, and utility and decorative hair accessories outside of the U.S. and Canada. Our third segment, Tactica, sells personal care and other consumer products directly to consumers through direct response marketing and to retailers. We present financial information for each of our operating segments in Note (10) of the Consolidated Financial Statements. The matters discussed in Item 1 pertain to all three of our operating segments, unless otherwise specified. We design, develop and sell a variety of personal care and comfort products under trademarks licensed from third parties, as well as under trademarks that we own. We outsource the manufacture of our products to third parties and sell most of those products to mass merchandisers, drug chains, warehouse clubs, grocery stores, beauty supply retailers and wholesalers, and directly to consumers in the U.S. and other countries. Products bearing licensed trademarks include those sold under the trademarks of VS Sassoon(R), licensed from The Procter & Gamble Company; Revlon(R), licensed from Revlon Consumer Products Corporation; Dr. Scholl's(R), licensed from Schering-Plough HealthCare Products, Inc.; Scholl(R) (in areas other than North America), licensed from Scholl Limited; and Sunbeam(R), licensed from Sunbeam Products, Inc. Trademarks owned by the Company include Helen of Troy(R), Salon Edition(R), Hot Tools(R), Ecstasy(TM), Gold Series(R), Hotspa(R), Gallery Series(R), Wigo(R), Caruso(TM), Dazey(R), Lady Dazey(R), Carel(R), Lady Carel(R), Sable(R), Karina(R), Karina Girl(TM), Kurl*Mi(R), Detangle*Mi(R), Heat*Mi(R), DCNL(TM), DCNL Signature(TM), IGIA(R), and Epil-Stop(R). We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy Limited in Bermuda in 1994. We do not engage in any activities involving special purpose entities or off-balance sheet financing. 1 PRODUCTS The business of Helen of Troy's North American and International segments is designing, developing and selling a full line of personal care and comfort products. Our products include hair dryers, curling irons, hair straighteners, hot air brushes, brush irons, home hair clippers and trimmers, mirrors, hairsetters, foot baths, body massagers, paraffin baths, hairbrushes, combs and hair accessories. The following table lists some of the products that the North American and International segments sell and some of the brand names that appear on those products.
PRODUCTS BRAND NAMES - -------- ----------- Hand-held hair dryers VS Sassoon(R), Revlon(R), Sunbeam(R), Helen of Troy(R), Salon Edition(R), Hot Tools(R), Ecstasy(TM), Gold Series(R), Gallery Series(R), Wigo(R), and Sable(R) Curling irons, hair straighteners, VS Sassoon(R), Revlon(R), Sunbeam(R), Helen of Troy(R), Salon Edition(R), Hot hot air brushes and brush irons Tools(R), Gold Series(R), Gallery Series(R) Ecstasy(TM), Wigo(R), and Sable(R). Hairsetters VS Sassoon(R), Revlon(R) and Caruso(TM) Paraffin baths, facial brushes, Revlon(R) and facial saunas Foot baths Dr. Scholl's(R), Scholl(R), Revlon(R), Carel(R) and Hotspa(R) Foot massagers, hydro massagers, Dr. Scholl's(R), Scholl(R), Carel(R) and Hotspa(R) cushion massagers and body massagers Hair clippers and trimmers Sunbeam(R) and VS Sassoon(R) Paraffin baths and other skin care Revlon(R), and Hotspa(R) appliances Hard and soft-bonnet hair dryers Dazey(R), Lady Dazey(R), Carel(R) and Hot Tools(R) Hair styling and utility VS Sassoon(R), Revlon(R), Wave Rage(TM), Nandi(TM), DCNL(TM), and Ecstasy(TM) implements Decorative hair accessories VS Sassoon(R), Karina(R), Karina Girl(TM), HOT things(TM), isobel(TM), DCNL(TM), and DCNL Signature(TM)
On March 14, 2000 we acquired a 55 percent ownership interest in Tactica International, Inc. ("Tactica"). Tactica's net sales comprised approximately 24 percent and five percent of the Company's consolidated net sales in fiscal 2002 and 2001, respectively. Tactica designs, develops and sells a variety of personal care and other consumer products in categories such as hair care, hair removal, dental care, skin care, sports and exercise, household, and kitchen. Tactica sells these products directly to consumers and through the retail distribution channel, primarily under the IGIA(R) and Epil-Stop(R) trademarks. Some of the products developed and marketed by Tactica are trend-oriented and have shorter product lives than Helen of Troy's other products. To create product awareness and interest, Tactica uses television infomercials and direct response marketing extensively. We continue, primarily through our marketing and engineering departments, to develop new products and enhance existing products in order to maintain and improve our position in the personal care and comfort product market. Significant product additions during fiscal 2002 included hair dryers and other hair care appliances using ion technology. For fiscal 2003, we are introducing a number of new products, including new massager products, Memory Foam(TM) pillows, a quiet hair dryer and other new hair care appliances that incorporate ionic technology, hair styling products aimed at the teen market, and a line of appliances created by designer Marc Newson. SALES AND MARKETING We market our products primarily within the U.S. Sales within the U.S. comprised 91 percent of net sales in fiscal 2002, 89 percent of net sales in fiscal 2001, and 88 percent of net sales in fiscal 2000. Our North American and 2 International operating segments sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores and beauty supply retailers and wholesalers. Both of these segments market our products through outside sales representative and through our own sales staff. Tactica primarily uses direct consumer marketing, such as television infomercials and catalog advertising to sell its products under the IGIA(R) and Epil-Stop(R) brands in the U.S. The companies from whom we license many of our brand names promote those names extensively. Revlon Consumer Products Corporation engages in national advertising of its beauty care products. The VS Sassoon(R), Dr. Scholl's(R) and Sunbeam(R) trademarks are widely recognized, because of advertising and the sale of a variety of products. We benefit from the name recognition associated with a number of our licensed trademarks and further improve the name recognition and perceived quality of all the trademarks under which we sell products through our own advertising and product development efforts. We promote our products through television advertising and through print media, including consumer and trade magazines and various industry trade shows. MANUFACTURING AND DISTRIBUTION We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples' Republic of China, Thailand, Taiwan, and South Korea, to manufacture most of the products sold by our North American and International segments (see discussion of International Manufacturing and Operations in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Risk Factors"). For fiscal 2002, goods manufactured by vendors in the Far East comprised approximately 90 percent of the dollar value of the North American and International segments' inventory purchases. Those segments purchase the remainder of their products from unaffiliated manufacturers in North America and Europe. The manufacturers who produce our products use molds and certain other tooling, some of which we own, in manufacturing those products. The North American and International segments employ numerous technical and quality control persons to assure high product quality. Our products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the U.S. and the West Coast of Canada. The products are then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Memphis, Tennessee; Toronto, Canada; and Vancouver, Canada, or directly to customers. We ship substantially all products to North American customers from these warehouses by ground transportation services. Products sold by the International segment outside the U.S. and Canada are shipped from manufacturers, primarily in the Far East, to warehouse facilities in Veenendaal, The Netherlands and Nottinghamshire, the United Kingdom, or directly to customers. Products stored at the warehouses in The Netherlands and the United Kingdom are shipped from those warehouses to distributors or retailers. Our customers in both the North American and International segments seek to minimize their inventory levels, but often demand that we fulfill their orders within relatively short time frames. Consequently, these inventory management practices often require us to carry substantial levels of inventory in order to meet our customers' needs. Tactica also contracts with unaffiliated manufacturers both within and outside the U.S. to manufacture its products. Tactica's products are shipped to a warehouse facility in Reno, Nevada for shipment to individuals or retail customers. Tactica also sometimes ships products from manufacturers directly to retailers. When selling to retail customers, Tactica often faces the same challenges as do our other two segments with regard to retailers' inventory management practices. Most of our three segments' products manufactured outside the countries in which they are sold are subject to import duties. 3 LICENSE AGREEMENTS, TRADEMARKS AND PATENTS Our North American and International operating segments depend materially upon the continued use of trademarks licensed under various agreements. The VS Sassoon(R) and Revlon(R) trademarks are of particular importance. New product introductions under licensed trademarks require approval from the respective licensors. The licensors also must approve the product packaging. Many of the license agreements require the Company to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising expenditures. The duration of the license agreements for the Revlon(R) and VS Sassoon(R) trademarks, including the renewal terms, exceeds ten years. Upon expiration of the current terms of these agreements, we have the unconditional right to extend their terms, upon payment of a renewal fee. The discussion below covers the primary product categories that Helen of Troy currently sells under its major license agreements. The product categories discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these agreements. Under license agreements with The Procter & Gamble Company, Helen of Troy is licensed to sell certain products using the VS Sassoon(R) trademark in the U.S., Canada, Mexico, and Western Europe. Products sold under the terms of these licenses include hair dryers, curling irons, brush irons, hairsetters, hot air brushes, hair clippers and hair trimmers, mirrors, brushes, combs and hair care accessories. Under agreements with Revlon Consumer Products Corporation, we are licensed to sell, worldwide, except in Western Europe, hair dryers, curling irons, hair straighteners, brush irons, hairsetters, brushes, combs, mirrors, functional hair accessories, personal spa products, hair clippers and trimmers and battery-operated and electric women's shavers bearing the Revlon(R) trademark. We are licensed to sell foot baths, foot massagers, hydro massagers, cushion massagers, and body massagers bearing the Dr. Scholl's(R) trademark in the U.S. and Canada, under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the same products under the Scholl(R) trademark in other areas of the world through an agreement with from Scholl Limited. Under agreements with Sunbeam Products, Inc. we are licensed to sell hair clippers, hair trimmers, hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure kits, hair brushes and combs, hair rollers, hair accessories, hair removal devices, and paraffin wax devices bearing the Sunbeam(R)trademark in the U.S., Canada, Mexico, Central America, South America, and the Caribbean. Helen of Troy has filed or obtained licenses for design and utility patents in the U.S. and several foreign countries. The Company does not believe that the loss of any particular patent or patent license would have a materially adverse effect on its business. RELIANCE ON ONE CUSTOMER Sales to Wal-Mart Stores, Inc., and one of its affiliates, accounted for approximately 22 percent, 23 percent, and 26 percent of our net sales in fiscal 2002, 2001, and 2000, respectively. No other customer accounted for ten percent or more of net sales in fiscal 2002, 2001, or 2000. ORDER BACKLOG There was no significant backlog of orders at February 28, 2002. COMPETITIVE CONDITIONS The markets in which we sell our products are very competitive. Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality, performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches. Our primary competitors include The Conair Corporation; Applica Incorporated; Remington Products Company; Goody Products, Inc., a division of Newell Rubbermaid 4 Inc.; Homedics-USA, Inc.; and The New L & N Marketing and Sales Corporation. These competitors possess known brand names and significant resources. SEASONALITY The Company's business is somewhat seasonal. Sales in the Company's fiscal second and third quarters, combined, accounted for approximately 57 percent of fiscal 2002 and 2001 net sales and for approximately 54 percent of net sales in fiscal 2000. As a result of the seasonality of sales, working capital needs fluctuate during the year. REGULATION Our electrical products must meet the safety standards imposed in various national, state, local and provincial jurisdictions. Our electrical products sold in the U.S. are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories. EMPLOYEES We employ 625 full-time employees in the U.S., Hong Kong and Europe, of which 216 are marketing and sales employees, 153 are distribution employees, 53 are engineering and development employees and 203 are administrative personnel. Included in these totals are 61 employees of Tactica. Tactica employs 44 administrative and 17 sales and marketing personnel. None of the Company's employees are covered by any collective bargaining agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees. GEOGRAPHIC INFORMATION Note (10) to the Consolidated Financial Statements contains geographic information concerning our net sales and long-lived assets. ITEM 2. PROPERTIES PLANT AND FACILITIES North American Segment. We own a 135,000 square foot office building in El Paso, Texas that houses our U.S. operations. The warehouse that we own in El Paso, Texas totals 408,000 square feet and is adjacent to the building housing the U.S. operations. The two buildings are located on a 50-acre plot of land that we own. We lease 108,000 square feet of warehouse space in El Paso, Texas; 360,000 square feet of warehouse space in Memphis, Tennessee; 60,000 square feet of warehouse space in Toronto, Canada; and 20,000 square feet of warehouse space in Vancouver, Canada. We also lease sales offices in Bentonville, Arkansas, Minneapolis Minnesota, Troy, Michigan, and Toronto, Canada. We own 22 acres of land in El Paso, Texas, near the 50 acres on which the warehouse and the U.S. office building that we own are located. The Company is holding this land for future business use. International Segment. We lease warehouse space in public warehouses located in Hong Kong; Veenendaal, The Netherlands and Nottinghamshire the United Kingdom. In addition, we also lease sales offices in the United Kingdom, France, and Germany. Tactica. Tactica leases administrative offices in New York, New York and leases public warehouse space in Reno, Nevada. Corporate. A subsidiary located in Hong Kong leases approximately 23,000 square feet of office space. Prior to fiscal 1996 this subsidiary was headquartered in approximately 12,000 square feet of office space that was acquired by condominium ownership. In fiscal 1998 the Company leased that office space to an unaffiliated company. 5 We also own 12,000 square feet of warehouse space on a 62,000 square foot lot adjacent to the building that formerly housed our U.S. operations. We are holding this property for sale and leasing it to an unaffiliated company. ITEM 3. LEGAL PROCEEDINGS The Hong Kong Inland Revenue Department ("the IRD") has assessed tax on certain profits of the Company's foreign subsidiaries for the fiscal years 1990 through 1997. Hong Kong taxes income earned from certain activities conducted in Hong Kong. The Company is vigorously defending its position that it conducted the activities that produced the profits in question outside of Hong Kong. The Company also asserts that it has complied with all applicable reporting and tax payment obligations. If the IRD's position were to prevail and if it were to assert the same position for years after fiscal 1997, the resulting tax liability could total $30,520,000 (U.S.) for the period from fiscal 1990 through fiscal 2002. In connection with the IRD's tax assessment, the Company was required to purchase $5,750,000 (U.S.) in tax reserve certificates in Hong Kong. The $5,750,000 represented approximately 50 percent of the liability assessed by the IRD for fiscal 1990 through fiscal 1997. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations. Although the ultimate resolution of the IRD's claims cannot be predicted with certainty, management believes that adequate provision has been made in the financial statements for the resolution of the IRD's claims. In the fourth quarter of the fiscal year ended February 28, 2001, the Company recorded a $2,457,000 charge for the remaining unamortized costs under a distribution agreement (which was later formally terminated) with The Schawbel Corporation ("Schawbel"), the supplier of the Company's butane hair care products. In a related matter, in September 1999, Schawbel commenced litigation in the U.S. District Court for the District of Massachusetts against The Conair Corporation ("Conair"), the predecessor distributor for Schawbel's butane products. In its action, amended in June 2000, Schawbel alleged, among other things, that Conair, following Schawbel's termination of the Conair distribution agreement, stockpiled and sold Schawbel product beyond the 120 day "sell-off" period afforded under the agreement, and manufactured, marketed and sold its own line of butane products which infringed patents held by Schawbel. In November 2000, the Massachusetts court granted Schawbel its request for preliminary injunction, and ordered that Conair cease selling all allegedly infringing products. The Company intervened as a plaintiff in the action to assert claims against Conair similar to the claims raised by Schawbel. The Company is seeking to recover damages in excess of $10 million, arising from the Company's inability to meet minimum purchase requirements under its distribution agreement with Schawbel and the subsequent termination of that agreement by Schawbel. Conair responded by filing a counterclaim alleging that the Company conspired with Schawbel to unlawfully terminate Conair's distribution agreement with Schawbel, and to disparage Conair's reputation in the industry. The counterclaim seeks $15 million in damages. Although the ultimate outcome of the matter cannot be predicted, the Company contends that Conair's counterclaims lack validity. The Company intends to pursue vigorously its claims and defense in the litigation. The Company is involved in various other legal claims and proceedings in the normal course of operations. In the opinion of management, the outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our Common Stock is listed on the NASDAQ National Market System [symbol: HELE]. The following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the Common Stock as reported on the NASDAQ National Market System. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
High Low ------ ------ FISCAL 2002 First quarter 9.42 5.16 Second quarter 14.80 7.75 Third quarter 13.20 7.99 Fourth quarter 15.79 10.26 FISCAL 2001 First quarter 7.88 6.19 Second quarter 6.94 4.75 Third quarter 7.50 4.00 Fourth quarter 7.06 4.00
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS We have one class of equity security outstanding at February 28, 2002; Common Stock with a par value of $0.10. As of May 3, 2002, there were 409 holders of record of the Company's Common Stock. Shares held in "nominee" or "street" name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder. We estimate that approximately 11,000 individuals and institutions hold our common stock. CASH DIVIDENDS The Board of Directors' current policy is to retain earnings to provide funds for the operation and expansion of the Company's business and for potential acquisitions. The Company has not paid any cash dividends on its Common Stock since inception. The Company's current intention is to pay no cash dividends in fiscal 2003. Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations, and other factors deemed relevant by the Board of Directors. 7 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial information set forth below has been summarized from the Company's Consolidated Financial Statements. This information should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data." All currency amounts in this document are denominated in U.S. dollars. For the year ended the last day of February (all numbers except earnings per share in thousands)
2002(1) 2001(1) 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Statements of Income Data Net sales $ 451,249 361,398 299,513 294,487 248,098 Cost of sales 238,859 220,530 185,685(2) 175,293 153,087 ---------- ---------- ---------- ---------- ---------- Gross profit 212,390 140,868 113,828 119,194 95,011 Selling, general and administrative expenses(4) 170,733 117,872 104,027(2) 82,480 64,529 ---------- ---------- ---------- ---------- ---------- Operating income 41,657 22,996 9,801 36,714 30,482 Interest expense (4,256) (3,989) (3,530) (3,337) (3,487) Other income(3)(4) 1,146 1,883 6,826 2,036 1,821 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes 38,547 20,890 13,097 35,413 28,816 Income tax expense (benefit) 9,332 3,558 (14) 7,083 6,484 ---------- ---------- ---------- ---------- ---------- Net earnings $ 29,215 17,332 13,111 28,330 22,332 ========== ========== ========== ========== ========== Per share data Basic $ 1.04 .61 .45 1.00 .83 Diluted $ 1.00 .60 .44 .96 .77 Weighted average number of common shares outstanding: Basic 28,089 28,420 29,053 28,279 26,856 Diluted 29,199 28,729 29,885 29,596 28,851
8 ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
Last Day of February (in thousands) 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Balance Sheet Data: Working capital $ 191,438 157,809 154,395 150,940 154,294 Total assets 357,558 337,181 304,252 294,036 227,560 Long-term debt 55,000 55,000 55,000 55,450 55,450 Stockholders' equity(5) 250,326 219,609 209,624 199,842 149,484 Cash dividends -- -- -- -- --
(1) Fiscal 2002 and 2001 results include 100 percent of the results of Tactica, a subsidiary in which the Company acquired a 55 percent interest in March 2000. (2) In fiscal 2000, the Company incurred $2,669,000 of charges to cost of goods sold and $8,725,000 of charges to selling, general and administrative expenses as a result of the discontinuance of its artificial nails product line. In fiscal 2000 the Company also incurred $770,000 of charges related to the restructuring and reorganization of several departments. (3) Other income includes gains of approximately $147,000 in fiscal 2002, $1,400,000 in fiscal 2001 and $6,300,000 in fiscal 2000 from the sale and appreciation of marketable securities. See "Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further discussion of gains from marketable securities. (4) Certain items that, prior to fiscal 2002, were classified as "other income" have been reclassified as reductions to SG&A expense. Those items totaled $434,000 in fiscal 2001 and $382,000 in each of fiscal 2000, 1999, and 1998. (5) In fiscal 2000 the Company repurchased 526,485 shares of its Common Stock at a cost of $4,076,000. In fiscal 2001, the Company repurchased 815,946 shares of its Common Stock at a cost of $4,623,000. No Common Stock was repurchased in any other year presented above. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in the sections entitled "Risk Factors" and "Information Relating to Forward Looking Statements" and in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected consolidated operating data for the Company as a percentage of net sales.
Relationship to Net Sales Fiscal Year 2002 2001 2000 ---------- ---------- ---------- Net sales 100.0% 100.0 100.0 Cost of sales 52.9 61.0 62.0 ---------- ---------- ---------- Gross Profit 47.1 39.0 38.0 Selling, general and administrative expenses 37.9 32.6 34.7 ---------- ---------- ---------- Operating income 9.2 6.4 3.3 Interest expense (0.9) (1.1) (1.2) Other income, net 0.3 0.5 2.3 ---------- ---------- ---------- Earnings before income taxes 8.6 5.8 4.4 Income taxes 2.1 1.0 -- ---------- ---------- ---------- Net Earnings 6.5% 4.8 4.4 ========== ========== ==========
10 Sales by operating segment for fiscal 2002, 2001 and 2000 were as follows:
% INCREASE (IN THOUSANDS) (DECREASE) ---------------------------------------- -------------------------- 2002 2001 versus versus SEGMENT 2002 2001 2000 2001 2000 - ------- ---------- ---------- ---------- ---------- ---------- North American $ 312,668 311,998 275,827 0% 13% International 29,906 25,390 23,686 18 7 Tactica 108,675 24,010 -- 353 n/a ---------- ---------- ---------- ---------- ---------- $ 451,249 361,398 299,513 25% 21% ---------- ---------- ---------- ---------- ----------
Operating income (loss) by operating segment for fiscal 2002, 2001 and 2000 was as follows:
% INCREASE (IN THOUSANDS) (DECREASE) ------------------------------------------ --------------------------- 2002 2001 versus versus SEGMENT 2002 2001 2000 2001 2000 - ------- ---------- ---------- ---------- ---------- ---------- North American $ 32,203 28,736 9,857 12% 192% International (244) 94 835 (359) (89) Tactica 11,930 (4,629) -- 358 -- Corporate / other (2,232) (1,205) (891) (85) (29) ---------- ---------- ---------- ---------- ---------- $ 41,657 22,996 9,801 81% 140% ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS Consolidated Sales and Gross Profit Margins Net sales for the 12 months ended February 28, 2002 ("fiscal 2002") improved 24.9 percent or $89,851,000, versus the 12 month period ended February 28, 2001 ("fiscal 2001"). All three of our operating segments exceeded their prior year sales totals, with the Tactica operating segment producing $84,665,000 of the fiscal 2002 sales increase. The International operating segment was responsible for most of the remaining sales growth. Net sales for fiscal 2001 increased 20.7 percent or $61,885,000 compared to the 12 months ended February 29, 2000 ("fiscal 2000"). Increased North American sales and the addition of the sales of Tactica contributed most of the fiscal 2001 sales growth. Sales in our International segment also improved during fiscal 2001, versus fiscal 2000. Excluding the Tactica segment, which was acquired in fiscal 2001, we achieved net sales growth of 12.6 percent in fiscal 2001. Gross profit, as a percentage of sales, for fiscal 2002 improved from 39.0 to 47.1 percent. Most of this increase was attributable to Tactica's higher sales. Tactica's net revenues made up 24.1 percent of our consolidated fiscal 2002 net sales, versus 6.6 percent in fiscal 2001, thus increasing the effect of its relatively high gross margins on consolidated gross margins. North American segment gross margins also improved from fiscal 2001 to fiscal 2002, primarily because of a favorable change in the mix of products sold and our ability to source product more efficiently. 11 Gross profit as a percentage of sales rose from 38.0 percent in fiscal 2000 to 39.0 percent in fiscal 2001. The sales of Tactica contributed significantly to the increase in gross profit. Additionally, gross profit for fiscal 2000 was reduced by a $2,669,000 pre-tax charge for the write-down of the Company's artificial nails inventory. The absence of such a charge in fiscal 2001 contributed to that year's improved gross profit as a percentage of sales. Slightly lower gross margins on some of the Company's other North American and International products partially offset factors that increased fiscal 2001 gross profit margins. Selling, general and administrative expense From fiscal 2001 to fiscal 2002, selling, general, and administrative expenses ("SG&A"), expressed as a percentage of net sales, increased from 32.6 to 37.9 percent. Tactica incurs substantially higher SG&A, as a percentage of its sales, than do the North American and International segments because of its more extensive use of infomercials and other forms of advertising. Because Tactica grew significantly during fiscal 2002, both in its sales volume and as a percentage of our consolidated business, all of its operating statistics, including SG&A as a percentage of sales, became much more significant to our overall results. This was the primary reason for higher SG&A, as a percentage of sales, during fiscal 2002. Although its SG&A percentage was higher than the percentages incurred by the other segments, Tactica's SG&A declined as a percentage of its sales from fiscal 2001 to fiscal 2002. The main reason for the decline was a drop in Tactica's fixed expenses as a percentage of its increased sales. The variable portion of Tactica's SG&A expense rose slightly as a percentage of sales, mainly because of higher advertising expense. Excluding Tactica, our fiscal 2002 SG&A as a percentage of sales was consistent with fiscal 2001, as lower media advertising expenses largely offset slightly higher personnel, insurance, and inventory storage costs. SG&A as a percentage of sales decreased to 32.6 percent in fiscal 2001, from 34.7 percent in fiscal 2000. Excluding Tactica, selling, general, and administrative expenses as a percentage of sales decreased from 34.7 percent in fiscal 2000 to 29.3 percent in fiscal 2001. Two factors contributed significantly to the decrease. First, because of fiscal 2001 sales growth, fixed expenses represented a smaller percentage of sales in fiscal 2001 than in fiscal 2000. Second, in fiscal 2000, we recognized more net expense than in fiscal 2001 in connection with the discontinuance of certain product lines and certain organizational changes. In fiscal 2000, we incurred $8,725,000 in pre-tax SG&A expenses related primarily to the discontinuance of our artificial nails business and also to other charges associated with strategic reorganizations of certain operations. In fiscal 2001, the Company recognized a charge for the discontinuance of a product line, combined with a benefit from the settlement of a license obligation which, when combined, resulted in a net $562,000 charge to fiscal 2001 SG&A. Partially offsetting the SG&A items that decreased in fiscal 2001 were higher media advertising expenditures in the North American segment and the higher levels of SG&A incurred by Tactica, relative to our other segments. North American Segment The North American segment sells hair care and other personal care and comfort appliances, hairbrushes, combs, and utility and decorative hair accessories in the U.S. and Canada. The North American segment's main customers are mass merchandisers, drug chains, warehouse clubs, grocery stores, and beauty supply retailers and wholesalers. North American segment sales remained relatively constant from fiscal 2001 to fiscal 2002, increasing by less than one percent. In the retail distribution channel, our new line of Ion hair care appliances and our private label products produced sales increases. Slight decreases in sales of some of our branded hair care and personal care appliances, as well as lower sales of brushes, combs and accessories offset partially the sales increases. Sales in the North American professional distribution channel grew mainly because of new product introductions and the expansion of some of our larger customers in this channel of distribution. The weakness of the U.S. economy in fiscal 2002, relative to the recent past, contributed to a difficult North American sales environment. We believe that new product introductions, strong positioning of our current products, and a healthier U.S. economy should lead to fiscal 2003 North American segment sales growth in all product categories and distribution channels. 12 The increase in the Company's fiscal 2001 North American sales, compared to fiscal 2000, was largely due to the internal development of new products and sales of a new product line. The Company introduced new quiet hair dryers, a new line of halogen hair care appliances, and a new line of personal spa products, including paraffin baths, during fiscal 2001. Additionally, sales of home hair clippers and trimmers under the Sunbeam(R) and Oster(R) names helped the Company achieve increased sales in the North American segment during fiscal 2001. Fiscal 2001 was the first year in which the Company sold hair clippers and trimmers. Sales of certain brush, comb and accessory products declined in fiscal 2001, partially offsetting the sales growth produced by the segment's other products. Operating income generated by the North American segment increased 12.1 percent in the fiscal year ended February 28, 2002, compared to the same period a year earlier. Expressed as a percentage of sales, the North American segment's operating income rose from 9.2 percent to 10.3 percent from fiscal 2001 to fiscal 2002. The improved North American operating results were primarily the result of higher gross profit margins, arising from favorable changes in the mix of products sold and our ability to source product more efficiently. Fiscal 2001 North American segment operating income increased by 191.5 percent over fiscal 2000. Operating income in the North American segment totaled 9.2 percent of net sales in that segment during fiscal 2001, versus 3.6 percent during fiscal 2000. During fiscal 2000, we recognized $8,725,000 in non-recurring expenses related to the discontinuance of the artificial nails product line and strategic reorganizations of some of our North American operations. By contrast, in fiscal 2001, we recognized net expenses of a non-recurring nature totaling $562,000. International Segment The International segment sells hair care and other personal care and comfort appliances, hairbrushes, combs, and utility and decorative hair accessories outside of the U.S. and Canada. The International segment, like the North American segment, sells primarily to mass merchandisers, drug chains, warehouse clubs, grocery stores, and beauty supply retailers and wholesalers. Increased sales in Latin and South America, France, and the United Kingdom ("U.K.") drove International segment sales up 17.8 percent during fiscal 2002. The growth in Latin America and South America was attributable to our successful efforts to increase distribution by expanding our customer base in that geographic area. The net sales increase in France was due both to the development of relationships with a larger number of customers and the growth of our business with existing customers. Expanded sales to some of our larger customers in the U.K. drove sales increases there. Higher sales in Latin and South America, particularly in Brazil, were the primary factor increasing International sales during fiscal 2001, relative to fiscal 2000. Sales in Germany and France also grew in fiscal 2001. Our International segment incurred an operating loss of $244,000 in fiscal 2002, compared to operating income of $94,000 in fiscal 2001. During fiscal 2002, we experienced collection difficulties with a customer in the Latin and South American market, as well as several customers in the Middle East. We are currently exploring strategies that might reduce our credit risk in the Latin and South American market. Such strategies will result in lower Latin and South American sales volume during the first quarter of and possibly throughout fiscal 2003. In addition to collection difficulties, inventory markdowns and currency exchange losses contributed to the International segment's operating loss. The International segment's operating profit declined from $835,000 in fiscal 2000 to $94,000 in fiscal 2001. This decrease in International operating income was largely the result of foreign exchange losses, as the U.S. Dollar gained substantial strength against foreign currencies, particularly the British Pound Sterling during fiscal 2001. 13 Tactica Segment We own a 55 percent ownership interest in Tactica International, Inc. ("Tactica"). Tactica sells a variety of personal care and other products to retailers and to individuals. Tactica uses infomercials and other forms of advertising extensively. As a result, Tactica incurs higher SG&A expenses, as a percentage of sales, than the North American and International operating segments. At the time that we acquired Tactica, we determined that use of the purchase method of accounting and consolidation was appropriate and we continue to use that method of consolidation. Tactica had accumulated a net deficit at the time that we acquired our interest in it and the minority shareholders have not adequately guaranteed their portion of the accumulated deficit. Therefore, our Consolidated Statements of Income for fiscal 2002 and fiscal 2001 include 100 percent of Tactica's net income and loss, respectively. We will continue to recognize all of Tactica's net income or loss until such time as Tactica's accumulated deficit is extinguished. After that time, our consolidated net earnings will include 55 percent of Tactica's net income or loss. We anticipate that Tactica's accumulated deficit will be extinguished during the quarter ending August 31, 2002. During fiscal 2002, Tactica's net revenues increased to over four times their fiscal 2001 levels. Tactica's line of Epil-Stop(R) hair removal products played the most significant role of any product in its fiscal 2002 sales increase. The Electrosage(TM) muscle stimulation / exercise product line and its new Twist-A-Braid(TM) hair styling accessory also contributed to higher fiscal 2002 sales. The Tactica segment is selling Epil-Stop(R), Electrosage(TM) and Twist-A-Braid(TM) to retailers and through direct response media. Tactica's operating income of $11,930,000 in fiscal 2002 was a $16,559,000 improvement over its fiscal 2001 operating loss of $4,629,000. Tactica's improvement in net sales was the primary factor leading to its better operating results in fiscal 2002. Higher fiscal 2002 revenues produced more gross profit for Tactica and caused its SG&A expenses, as a percentage of sales, to decrease. As discussed above, Tactica's net sales grew substantially in fiscal 2002 from fiscal 2001, comprising 24 percent and five percent, respectively, of the Company's consolidated net sales during such periods. In addition, the increase in Tactica's sales in fiscal 2002 accounted for 94 percent of the increase in our consolidated sales during this period. Tactica's sales in fiscal 2002 were comprised heavily of the Epil-Stop(R) product line, which has an unproven product life cycle. Tactica also sells other products that have short life cycles. Furthermore, Tactica relies on television infomercials and direct response marketing campaigns for the marketing of its products. Accordingly, Tactica's sales may be more volatile than the business of our other two segments. The results of our business could be adversely affected by decreases in sales of Tactica products. Interest expense and Other income / expense Interest expense increased by 6.7 percent, or $267,000, in fiscal 2002, versus fiscal 2001, due to increased borrowings under our line of credit during the first three quarters of fiscal 2002. The increase in borrowings was due to our relatively high levels of inventory purchases early in the year. Such purchases enabled us to obtain products from suppliers at favorable prices. Interest expense increased to $3,989,000 in fiscal 2001 from $3,530,000 in fiscal 2000. The capitalization of interest on the construction of our new U.S. office building during the first two quarters of fiscal 2000 lowered interest expense for that year. No interest was capitalized during fiscal 2001. Other income decreased to $1,146,000 in fiscal 2002, compared to $1,883,000 in fiscal 2001. The primary reason for the decrease was a drop in income from the sale and appreciation of marketable securities from approximately $1,400,000 in fiscal 2001 to $147,000 in fiscal 2002. Interest income also fell because of lower interest rates and because of lower cash balances for most of fiscal 2002, versus fiscal 2001. 14 Other income decreased to $1,883,000 in fiscal 2001 from $6,826,000 in fiscal 2000. Lower income from the sale and appreciation of marketable securities accounted for most of this decrease. Income from the sale and appreciation of marketable securities was approximately $1,400,000 in fiscal 2001, versus $6,300,000 for fiscal 2000. Income tax expense In fiscal 2002 our income tax expense was 24.2 percent of net income before income taxes, as opposed to 17.0 percent in fiscal 2001. The main reason for this change was Tactica. Tactica incurs a total income tax rate of approximately 45 percent, versus 20 percent for our other two segments combined. Because Tactica produced net income during fiscal 2002, our effective tax rate rose above 20 percent. The removal during fiscal 2002 of a valuation allowance from a $1,115,000 deferred tax asset reduced Tactica's income tax expense below 45 percent for the fiscal year. Fiscal 2001 income tax expense totaled $3,558,000 or 17.0 percent of earnings before income taxes, versus a tax benefit of $14,000 in fiscal 2000 on $13,097,000 in earnings before income taxes. The Company's effective tax rate for each of fiscal 2001 and fiscal 2000 was reduced below rates of approximately 20 percent that it had experienced prior to fiscal 2000. During both fiscal 2001 and fiscal 2000, the Company's tax rate was reduced by the fact that Helen of Troy Limited, the Bermuda Corporation, which is not subject to any capital gains or other income tax, holds the consolidated group's investments in marketable securities. In addition, the charges associated with the Company's discontinuance of its artificial nails product line created tax benefits on the books of a U.S. subsidiary that offset much of the tax expense associated with the income of non-U.S. subsidiaries. LIQUIDITY AND CAPITAL RESOURCES During fiscal 2002, we substantially strengthened our financial condition. Our cash balance increased, while our inventory balance decreased. In addition, at February 28, 2002 we had no borrowings outstanding on our working capital line of credit, versus a $10,000,000 balance on the same date a year earlier. Our cash balance increased 147.9 percent to $64,293,000 at February 28, 2002, compared to $25,937,000 at February 28, 2001. Operating activities provided $52,589,000 of cash during fiscal 2002, compared to using $185,000 during the previous fiscal year. In addition to net income, our successful efforts to reduce inventory balances were instrumental in the production of cash from operating activities. Investing activities used $5,735,000, due primarily to our prepayment of approximately $3,000,000 in royalties on an international royalty agreement. Financing activities used $8,499,000, mainly because we began the year with $10,000,000 borrowed under our line of credit and reduced that amount to zero by the end of fiscal 2002. Net accounts receivable increased 8.8 percent from February 28, 2001 to February 28, 2002. The percentage increase in accounts receivable is substantially less than the 24.9 percent increase in net sales that we achieved during fiscal 2002. The fiscal 2002 growth in Tactica's cash sales to consumers, relative to total net sales, was the primary reason that accounts receivable grew by a smaller percentage than net sales. Our February 28, 2002 inventory balance totaled $100,306,000, versus $118,544,000 at February 28, 2001, a 15.4 percent decrease. After making substantial purchases during the first half of fiscal 2002 in order to obtain favorable pricing from suppliers, we engaged in a successful effort to reduce our inventory levels mainly by curtailing inventory purchases in the second half of fiscal 2002. Our working capital balance increased to $191,438,000 at February 28, 2002 from $157,809,000 at February 28, 2001. Our current ratio was 4.7 at February 28, 2002, compared to 3.5 at February 28, 2001. The increase in our current ratio was largely due to the production of cash by our operating activities, lower levels of accounts payable, and the repayment of borrowings under the working capital line of credit in fiscal 2002. The decrease in accounts payable is primarily the result of lower levels of inventory purchases. 15 In connection with its acquisition of a 55 percent interest in Tactica, the Company loaned $3,500,000 to the minority shareholders of Tactica. The interest rate on these loans is 8.75 percent. All principal and unpaid interest on these loans is due March 14, 2005. The total amounts of principal and accrued interest due to the Company under these loans were $4,103,000 and $3,826,000 at February 28, 2002 and 2001, respectively. These amounts are included in "Other assets" on the Consolidated Balance Sheets. We maintain a revolving credit loan with a bank to facilitate short-term borrowings and the issuance of letters of credit. This line of credit allows borrowings totaling $25,000,000, incurs interest at the three-month LIBOR rate plus a percentage that varies based on the ratio of the Company's debt to its earnings before interest, taxes, depreciation, and amortization (EBITDA), and expires August 31, 2003. At February 28, 2002 the interest rate charged under the line of credit was 2.89 percent. This line of credit allows for the issuance of letters of credit up to $7,000,000. Any outstanding letters of credit reduce the $25,000,000 maximum borrowing limit on a dollar-for-dollar basis. At February 28, 2002, there were no borrowings under this line of credit and outstanding letters of credit totaled $439,000. The revolving credit agreement provides that the Company must satisfy requirements concerning its minimum net worth, total debt to consolidated total capitalization ratio, debt to EBITDA ratio and its fixed charge coverage ratio. The Company is in compliance with all of these requirements. Our $55,000,000 of long-term debt is comprised of a group of unsecured Senior Notes with face values totaling $40,000,000 and an interest rate of 7.01 percent, as well as an unsecured Senior Note with a face value of $15,000,000 and an interest rate of 7.24 percent. We pay interest on these notes each calendar quarter. The $40,000,000 group of Senior Notes require annual principal payments of $10,000,000 beginning January 5, 2005, with the final payment due January 5, 2008. The $15,000,000 Senior Note requires annual principal payments of $3,000,000 beginning July 18, 2008, with the final payment due July 18, 2012. The Senior Notes contain covenants that require the Company to meet certain net worth and other financial requirements. Additionally, the Senior Notes restrict the Company from incurring liens on any of its properties, except under certain conditions. The Company is in compliance with all the terms of these notes. Capital and license expenditures totaled $878,000, $3,185,000, and $8,340,000 in fiscal 2002, 2001, and 2000, respectively. Our operations are not typically capital intensive. On a normal operating basis, we are likely to incur approximately $1,000,000 in capital expenditures annually. In fiscal 2000, capital expenditures included $3,788,000 of expenditures associated with the construction of our U.S. office facility. We incurred capitalized license fees of $1,834,000 and $1,798,000 in fiscal 2001 and 2000, respectively. We are in the process of negotiating the renewal and modification of certain license agreements, which we expect to complete during fiscal 2003 at aggregate expenditures during fiscal 2003 of $3,000,000. Our contractual obligations and commercial commitments as of February 28, 2002 were:
Payments Due by Period (in 000s) ------------------------------------------------------------------------ Contractual Less than 1 Obligations Total year 1-3 years 4-5 years After 5 years - ----------- ---------- ----------- ---------- ---------- ------------- Long-term debt $ 55,000 -- 20,000 10,000 25,000 Open purchase orders - inventory 18,828 18,828 -- -- -- Minimum royalty payments 49,220 8,655 13,621 13,730 13,214 ---------- ---------- ---------- ---------- ---------- Total contractual obligations $ 123,048 27,483 33,621 23,730 38,214 ========== ========== ========== ========== ==========
We do not engage in any activities involving special purpose entities or off-balance sheet financing. Under a September 1999 Board of Directors resolution, the Company may repurchase up to a total of 3,000,000 shares of its Common Stock over a period extending to September 29, 2002. Since the inception of this Common Stock repurchase program, the Company repurchased a total of 1,342,431 shares of its Common Stock for $8,699,196, including commissions, or an average price per share of $6.48. No Common Stock was repurchased during fiscal 2002. 16 Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company's ongoing liquidity needs for the foreseeable future. We expect that our capital needs will stem primarily from the needs to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we evaluate acquisition opportunities on a regular basis and might augment our internal growth with acquisitions of complimentary businesses and product lines. We might finance acquisition activity with available cash, the issuance of stock, or with additional debt, depending upon the size and nature of any such transaction and upon conditions in the capital markets. CRITICAL ACCOUNTING POLICIES The U.S. Securities and Exchange Commission defines critical accounting policies as "those that are both most important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain." Preparation of our financial statements involves the application of several such policies. These policies include: consolidation of Tactica International, Inc. (Tactica) under the purchase method, estimates of our exposure to liability for income taxes in Hong Kong, estimates of credits to be issued to customers for sales that have already been recorded, the calculation of our allowance for doubtful accounts, and the valuation of inventory on a lower-of-cost-or-market basis. Consolidation of Tactica - In March 2000 (fiscal 2001), we acquired a 55 percent interest in Tactica. At that time, we determined that use of the purchase method of accounting and consolidation was appropriate and we continue to use that method of consolidation. Because Tactica had accumulated a net deficit at the time that we acquired our interest in it and because the minority shareholders of Tactica have not adequately guaranteed their portion of the accumulated deficit, our Consolidated Statements of Income for fiscal 2002 and fiscal 2001 include 100 percent of Tactica's net income or loss. We will continue to recognize all of Tactica's net income or loss until such time as Tactica's accumulated deficit is extinguished. After that time, our consolidated net earnings will include 55 percent of Tactica's net income or loss. Hong Kong Income Taxes - The Inland Revenue Department ("the IRD") in Hong Kong assessed tax on certain profits of the Company's foreign subsidiaries for the fiscal years 1990 through 1997. The ultimate resolution of the IRD's claims cannot be predicted with certainty. However, we have recorded a liability for the IRD's claims, based on consultations with outside Hong Kong tax experts as to the probability that some or all of the IRD's claims prevail. Such liability is included in "Income taxes payable" on the Consolidated Balance Sheets. If the IRD's position were to prevail and it were to assert the same position with respect to fiscal years after 1997, the resulting tax liability could total $30,520,000 (U.S.) for the period from fiscal 1990 through fiscal 2002. Estimates of credits to be issued to customers - We regularly receive requests for credits from retailers for returned product or in connection with sales incentives, such as co-operative advertising and volume rebate agreements. We reduce sales or increase selling, general, and administrative expenses, depending on the nature of the credits, for estimated future credits to customers. Our estimates of these amounts are based either on historical information about credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. Allowance for doubtful accounts - From time to time, amounts due from our customers become uncollectible due to the customers' inability to pay. We record allowances specifically for customers' balances based on the probability that we will not receive payment. When major customers declare bankruptcy, we record an allowance equal to the amount due from that customer, less the portion of the receivable that we expect to collect either by selling the receivable in a secondary market or through settlement with the bankruptcy estate. Valuation of inventory - We account for our inventory using a first-in-first-out system in which we record inventory on our balance sheet at the lower of its cost or its net realizable value. Determination of net realizable 17 value requires management to estimate the point in time at which an item's net realizable value drops below its cost. We regularly review our inventory for slow-moving items and for items that we are unable to sell at prices above their original cost. When we identify such an item, we reduce its book value to the net amount that we expect to realize upon its sale. This process entails a significant amount of inherent subjectivity and uncertainty. In addition to the above policies, several other policies, including policies governing the timing of revenue recognition, are important to the preparation of our financial statements, but do not meet the definition of critical accounting policies because they do not involve subjective or complex judgements. RISK FACTORS Competition. The personal care and comfort products industry is extremely competitive. Maintaining and gaining market share depends heavily upon price, quality, brand name recognition, patents, innovation in the design of new products and replacement models, and marketing and distribution approaches. We compete with domestic and international companies, some of which have substantially greater financial and other resources than those of the Company. We believe that our ability to produce reliable products that incorporate developments in technology and to satisfy consumer tastes with respect to style and design, as well as our ability to market a broad offering of products in each applicable category at competitive prices, are keys to our future success. No assurance can be given that we will be able to successfully compete on the basis of these factors in the future. Dependence Upon Licenses and Trademarks. A substantial portion of our sales revenue is derived from sales of products under licensed trademarks. As a result, we are materially dependent upon the continued use of such trademarks, particularly the VS Sassoon(R) and Revlon(R) trademarks. Actions taken by licensors and other third parties could diminish greatly the value of any of our licensed trademarks. If we were unable to sell products under these licensed trademarks the effect on our business, financial condition and results of operations could be both negative and material. Income Taxes. Currently, we benefit from an international corporate structure that results in relatively low tax rates on a consolidated basis. If we were to encounter significant changes in the rates or rules imposed by certain key taxing jurisdictions, such changes could have a material adverse effect on the Company's financial position and profitability. In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our income not being subject to taxation in the U.S. If such income were subject to U.S. federal income taxes, our effective income tax rate would increase materially. Several bills have been introduced recently in the U.S. Congress that, if enacted into law, could adversely affect our U.S. federal income tax status. At least one of the bills introduced would apply to companies such as ours that restructured several years ago. That bill could, if enacted into law, subject a greater portion of our income to U.S. income taxes, thereby reducing our net income. Other bills introduced recently would exempt restructuring transactions, such as ours, that were completed before certain dates in 2001 and 2002, but would limit the deductibility of payments made in certain intercompany transactions for U.S. income tax purposes and would subject gains on certain asset transfers to U.S. income tax. In addition to the legislation introduced in Congress, the U.S. Treasury Department recently published a study of restructurings such as ours. It is not currently possible to predict whether the legislation that has been introduced will become law, whether any additional bills will be introduced, or the consequences of the U.S. Treasury Department's study. However, there is a risk that new laws in the U.S. could eliminate or substantially reduce the current income tax benefits of our corporate structure. If this were to occur, such changes could have a material adverse effect on our financial condition and results of operations. In addition to potential changes in tax laws, the Company's position on various tax matters may be challenged, as is the case with the Hong Kong Inland Revenue Department matter discussed in "Item 3. Legal Proceedings." Our ability to maintain our position that the parent company is not a Controlled Foreign Corporation (as defined under the U.S. Internal Revenue Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning ten percent or more of its stock) together own more than 50 percent of the stock in such corporation. If a change of ownership of the Company were to occur 18 such that the parent company became a Controlled Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on the Company's business. International Manufacturing and Operations. All of our products are manufactured by unaffiliated companies, most of which are in the Far East. Risks associated with such foreign manufacturing include: changing international political relations; changes in laws, including tax laws, regulations, and treaties; changes in labor laws, regulations, and policies; changes in customs duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; and the availability and cost of raw materials and merchandise. To date, these factors have not significantly affected our production in the Far East. However, any change that impairs our ability to obtain products from such manufacturers, or to obtain products at marketable rates, could have a material negative effect on our business, financial condition and results of operations. Inventory. Because of our reliance on manufacturers in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand accurately we may encounter difficulties in filling customer orders or in liquidating excess inventories, or may find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of storing inventory. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Any of these results could have a material adverse effect on our business, financial condition and result of operations. Newly Acquired Product Lines and Subsidiaries. We may decide to grow our business through the acquisition of new product lines and businesses. The acquisition of a business or of the rights to market specific products or use specific product names involves a financial commitment. In the case of an acquisition such commitments are usually in the form of either cash or stock consideration. In the case of a new license, such commitments could take the form of license fees, prepaid royalties and future minimum royalty and advertising payments. While our strategy is to acquire businesses and to develop products that will contribute positively to earnings, there is no guarantee of such results. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations, and acquired businesses may carry unexpected liabilities. Each of these factors could result in a newly acquired business or product line having a material negative impact on financial condition and results of operations. Reliance Upon Certain Customers. We are dependent on certain principal customers. Wal-Mart Stores, Inc., and one of its affiliates, accounted for approximately 22 percent of the Company's net sales in fiscal 2002. Our top three customers accounted for approximately 35 percent of fiscal 2002 net sales. Although we have long-standing relationships with our major customers, no contracts require these customers to buy from us. A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and results of operations. Tactica's Potential Sales Volatility. Tactica's net sales grew substantially in fiscal 2002 from fiscal 2001, comprising 24 percent and five percent, respectively, of the Company's consolidated net sales during such periods. In addition, the increase in Tactica's sales in fiscal 2002 accounted for 94 percent of the increase in our consolidated sales during this period. Tactica's sales in fiscal 2002 were comprised heavily of the Epil-Stop(R) product line, which has an unproven product life cycle. Tactica also sells other products that have short life cycles. Furthermore, Tactica relies on television infomercials and direct response marketing campaigns for the marketing of its products. Accordingly, Tactica's sales may be more volatile than the business of our other two segments. The results of our business could be adversely affected by decreases in sales of Tactica products. Tactica Stockholders' Agreement. One of our subsidiaries is a party to a stockholders' agreement with the former owners of Tactica, who retained a 45 percent interest in Tactica (collectively the "other Tactica stockholders"). Under the terms of the stockholders' agreement, we have been granted the right to initiate a process whereby we can purchase, and the other Tactica stockholders are required to sell, the shares they own. In addition, the other Tactica stockholders have the right to initiate a process regarding the sale of their remaining interest in Tactica. 19 We may elect at our option not to purchase the shares owned by the other Tactica stockholders and under the terms of the stockholders' agreement the parties will then be required to initiate a procedure under which the entire business of Tactica would be offered for sale to third parties. In either case, the purchase price will be based upon fair market value as determined by independent appraisal. A sale to a third party would be subject to the approval of the other Tactica stockholders and us. In the event that either party exercises its rights under the stockholders' agreement, our financial position and profitability could be adversely affected. U.S. and Worldwide Economic Conditions. Adverse changes in economic conditions that affect consumer spending or worldwide economic conditions could have a material negative effect on the Company's financial condition and results of operations. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS Certain written and oral statements made by our Company and subsidiaries or with the approval of an authorized executive officer of our Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the Securities and Exchange Commission, in press releases, and in certain other oral and written presentations. Generally, the words "anticipates," "believes," "expects" and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results and statements expressing general expectations about future operating results, are forward-looking statements. The Company cautions readers not to place undue reliance on forward-looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Factors that could cause actual results to differ from those anticipated include: o general industry conditions and competition, o credit risks, o the Company's, or its operating segments' material reliance on individual customers or small numbers of customers, o the Company's material reliance on certain trademarks, o the impact of tax legislation, regulations, or treaties, including proposed legislation in the U.S. that would affect companies or subsidiaries of companies that have headquarters outside the U.S. and file U.S. income tax returns, o the impact of other current and future laws, and regulations, o the results of our disagreement with the Hong Kong Internal Revenue Department concerning the portion of our profits subject to Hong Kong income tax, o any future disagreements with the U.S. Internal Revenue Service or other taxing authority regarding our assessment of the effects or interpretation of existing tax laws, regulations, or treaties, o risks associated with inventory, including potential obsolescence, o risks associated with new products and new product lines, o risks associated with operating in foreign jurisdictions, o foreign currency exchange losses, o worldwide and domestic economic conditions, o uninsured losses, o reliance on computer systems, o management's reliance on the representations of third parties, o risks associated with new business ventures and acquisitions, o risks associated with investments in equity securities, and o the risks described from time to time in the Company's reports to the Securities and Exchange Commission, including this report. 20 NEW ACCOUNTING GUIDANCE In April 2001, the FASB's Emerging Issues Task force ("EITF") reached consensus on EITF Issue 00-25 ("EITF 00-25"), "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer." EITF 00-25 requires vendors who offer certain allowances to customers to characterize those allowances as reductions of net sales, rather than as selling, general, and administrative expenses ("SG&A"). EITF 00-25 is applicable for fiscal quarters beginning after December 15, 2001 and requires restatement of prior periods if possible. Had the Company applied EITF 00-25 its net sales and SG&A in fiscal 2002, 2001, and 2000 would have decreased by $3,023,000, $2,672,000 and $1,665,000, respectively. EITF 00-25 will be applied beginning in fiscal 2003. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that an entity recognize all derivatives in its financial statements and measure those instruments at fair value. SFAS 133 was effective for fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133 did not affect the Company's Consolidated Financial Statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 is effective for the Company beginning March 1, 2002. It eliminates the amortization of goodwill and other intangible assets that have indefinite useful lives. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. In complying with SFAS 142, we will review the goodwill on our Consolidated Balance Sheets to determine whether it is impaired. We will determine fair values using discounted cash flow analysis. We estimate that the cumulative effect of adopting SFAS 142 will be a non-cash after-tax charge ranging from $15 million to $20 million in the first quarter of fiscal 2003. We will record this amount as a cumulative effect of an accounting change. Because it eliminates the amortization of goodwill, SFAS 142 will decrease our SG&A expense by approximately $2,000,000 in fiscal 2003. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in interest rates and currency exchange rates represent our primary financial market risks. Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash. Our long-term debt is at fixed rates ranging from 7.01 percent to 7.24 percent. Increases in interest rates do not expose us to risk on this debt. However, as interest rates drop below the rates on our long-term debt, our interest cost can exceed the cost of capital of other companies who are borrowing at lower rates of interest. As mentioned in the "Liquidity and Capital Resources" discussion, interest rates on our revolving credit agreement vary based on the three-month LIBOR rate and on our ratio of debt to EBITDA. Therefore, the potential for interest rate increases exposes us to interest rate risk on our revolving credit agreement. That agreement allows maximum borrowings of $25,000,000. At the end of fiscal 2002, no borrowings were outstanding under this agreement. However, if the need to borrow under the revolving credit agreement were to arise, higher interest rates would increase the cost of such debt. We do not currently hedge against interest rate risk. Because we purchase a substantial majority of our inventory using U.S. dollars, we are subject to minimal foreign exchange rate risk in purchasing inventory. Sales in countries other than the United Kingdom, Germany, and France are transacted in U.S. dollars. Our sales in the United Kingdom are transacted in British Pounds and our sales in France and Germany are invoiced in Euros. Until January 1, 2002, we also transacted sales in France and Germany in French Francs and German Marks, respectively. When the U.S. dollar strengthens against other currencies in which we transact sales, we are exposed to foreign exchange losses on those sales because our foreign currency sales prices are not adjusted for currency fluctuations. In fiscal 2002, our gross sales in currencies other than the U.S. dollar totaled approximately $22,500,000, converted at average monthly exchange rates. Our fiscal 2002 foreign currency exchange loss totaled $307,000. We do not currently hedge against foreign currency fluctuations. The transition in 12 European countries from their local currencies to the Euro on January 1, 2002 did not affect our business materially. The effect of the transition for us is that sales that would previously have been invoiced in French Francs or German Marks are now invoiced in Euros. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page ---- Independent Auditors' Report 24 Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, 2002 and 2001 25 Consolidated Statements of Income for each of the years in the three-year period ended February 28, 2002 27 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended February 28, 2002 28 Consolidated Statements of Cash Flows for each of the years in the three-year period ended February 28, 2002 29 Notes to Consolidated Financial Statements 31 Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended February 28, 2002 47
All other schedules are omitted as the required information is included in the consolidated financial statements or is not applicable. 23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Helen of Troy Limited: We have audited the consolidated financial statements of Helen of Troy Limited and subsidiaries (the Company) as listed in the index on page 23. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the index on page 23. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helen of Troy Limited and subsidiaries as of February 28, 2002 and February 28, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth thereon. KPMG LLP El Paso, Texas May 3, 2002 24 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 2002 and 2001 (in thousands, except par value and shares)
Assets 2002 2001 ---------- ---------- Current assets: Cash and cash equivalents $ 64,293 25,937 Marketable securities, at market value 145 1,956 Receivables - principally trade, less allowance of $5,794 in 2002 and $4,081 in 2001 69,943 64,310 Inventories 100,306 118,544 Prepaid expenses 3,256 2,516 Deferred income tax benefits 5,727 7,118 ---------- ---------- Total current assets 243,670 220,381 Property and equipment, at cost less accumulated depreciation of $11,998 in 2002 and $9,133 in 2001 45,716 47,763 Goodwill, net of accumulated amortization of $8,629 in 2002 and $6,594 in 2001 40,767 42,808 License agreements, at cost less accumulated amortization of $11,842 in 2002 and $10,676 in 2001 6,678 7,844 Other assets at cost, net 20,727 18,385 ---------- ---------- $ 357,558 337,181 ========== ==========
(Continued) 25 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 2002 and 2001 (in thousands, except par value and shares)
2002 2001 ---------- ---------- Liabilities and Stockholders' Equity Current liabilities Notes payable to banks $ -- 10,000 Accounts payable, principally trade 11,549 21,003 Accrued expenses: Advertising and promotional 5,183 5,101 Other 15,369 8,343 Income taxes payable 20,131 18,125 ---------- ---------- Total current liabilities 52,232 62,572 Long-term debt 55,000 55,000 ---------- ---------- Total liabilities 107,232 117,572 ---------- ---------- Stockholders' equity Cumulative preferred stock, non-voting, $1.00 par value. Authorized 2,000,000 shares; none issued -- -- Common stock, $.10 par value. Authorized 50,000,000 shares; 28,196,517 and 28,065,526 shares issued and outstanding at February 28, 2002 and 2001, respectively 2,820 2,806 Additional paid-in-capital 53,424 52,206 Retained earnings 195,474 169,503 Minority interest in deficit of acquired subsidiary (1,392) (4,906) ---------- ---------- Total stockholders' equity 250,326 219,609 ---------- ---------- Commitments and contingencies $ 357,558 337,181 ========== ==========
See accompanying notes to consolidated financial statements. 26 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Income (in thousands, except shares and earnings per share)
Year Ended the Last Day of February ------------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Net Sales $ 451,249 361,398 299,513 Cost of sales 238,859 220,530 185,685 ------------ ------------ ------------ Gross profit 212,390 140,868 113,828 Selling, general and administrative expenses 170,733 117,872 104,027 ------------ ------------ ------------ Operating income 41,657 22,996 9,801 Other income (expense): Interest expense (4,256) (3,989) (3,530) Other income, net 1,146 1,883 6,826 ------------ ------------ ------------ Total other income (expense) (3,110) (2,106) 3,296 ------------ ------------ ------------ Earnings before income taxes 38,547 20,890 13,097 Income tax expense (benefit) 9,332 3,558 (14) ------------ ------------ ------------ Net earnings $ 29,215 17,332 13,111 ============ ============ ============ Earnings per share: Basic $ 1.04 .61 .45 Diluted $ 1.00 .60 .44 Weighted average number of common shares used in computing net earnings per share Basic 28,089,072 28,420,073 29,052,788 Diluted 29,198,972 28,728,762 29,885,260
See accompanying notes to consolidated financial statements. 27 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended last day of February 2002, 2001 and 2000 (in thousands)
Minority Interest in Additional Deficit of Total Common Paid-In Retained Acquired Stockholders' Stock Capital Earnings Subsidiary Equity ---------- ---------- ---------- ----------- ------------- Balances, February 28, 1999 $ 2,905 $ 53,750 $ 143,187 $ -- $ 199,842 Exercise of common stock options, net 16 913 -- -- 929 Issuance of common stock in connection with employee stock purchase plan 4 360 -- -- 364 Net issuance of (recovery) common stock in connection with Acquisitions 12 (558) -- -- (546) Acquisition and retirement of common stock (53) (971) (3,052) -- (4,076) Net earnings -- -- 13,111 -- 13,111 ---------- ---------- ---------- ---------- ---------- Balances, February 29, 2000 $ 2,884 53,494 153,246 -- 209,624 Exercise of common stock options, net 1 52 -- -- 53 Issuance of common stock in connection with employee stock purchase plan 3 168 -- -- 171 Acquisition and retirement of common stock (82) (1,508) (3,033) -- (4,623) Minority interest in deficit of acquired subsidiary at date of acquisition -- -- -- (2,948) (2,948) Net earnings -- -- 19,290 (1,958) 17,332 ---------- ---------- ---------- ---------- ---------- Balances February 28, 2001 $ 2,806 52,206 169,503 (4,906) 219,609 Exercise of common stock options, net 10 710 -- -- 720 Issuance of common stock in connection with employee stock purchase plan 4 178 -- -- 182 Capital contribution to subsidiary by minority shareholders -- 330 -- 270 600 Net earnings -- -- 25,971 3,244 29,215 ---------- ---------- ---------- ---------- ---------- Balances February 28, 2002 $ 2,820 $ 53,424 $ 195,474 $ (1,392) $ 250,326 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 28 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
Years Ended Last Day of February ------------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 29,215 17,332 13,111 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,630 8,137 6,921 Provision for doubtful receivables 2,153 1,003 559 Deferred taxes, net 1,391 (2,148) (1,112) Purchases of marketable securities (431) (1,579) (16,340) Proceeds from sales of marketable securities 2,407 2,006 21,530 Realized gain - trading securities (777) (688) (6,265) Unrealized (gain) loss - trading securities 612 (701) 81 Loss on disposal of property, plant and equipment 17 -- -- Impairment of asset held for sale -- 158 650 Other non-cash adjustments to income -- 2,457 1,783 Changes in operating assets and liabilities: Accounts receivable (7,786) (12,053) 6,324 Inventory 18,238 (20,011) (6,671) Prepaid expenses (740) 1,483 (1,871) Accounts payable (9,454) 8,240 4,703 Accrued expenses 7,108 (8,892) 5,827 Income taxes payable 2,006 5,071 (600) ------------ ------------ ------------ Net cash provided (used) by operating activities 52,589 (185) 28,630 ------------ ------------ ------------ Cash flows from investing activities: Capital and license expenditures (878) (3,185) (8,340) Cash paid for acquisitions, net of cash acquired -- (2,205) (1,798) Proceeds from sales of property, plant, and equipment 43 -- -- Increase in other assets (4,900) (7,904) (4,589) ------------ ------------ ------------ Net cash used by investing activities (5,735) (13,294) (14,727) ------------ ------------ ------------
(Continued) 29 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)
Years Ended Last Day of February ------------------------------------------ 2002 2001 2000 ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from (payments on) short-term borrowings (10,000) 10,000 (10,000) Payments on long-term debt -- (450) -- Capital contribution to subsidiary by minority shareholders 600 -- -- Proceeds from exercise of stock options, net 902 224 747 Common stock repurchases -- (4,623) (4,076) ---------- ---------- ---------- Net cash (used in) provided by financing activities (8,498) 5,151 (13,329) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 38,356 (8,328) 574 ---------- ---------- ---------- Cash and cash equivalents, beginning of year 25,937 34,265 33,691 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 64,293 25,937 34,265 ========== ========== ========== Supplemental cash flow disclosures: Interest paid $ 4,278 3,982 4,210 Income taxes paid (net of refunds) $ 5,776 1,015 1,177
See accompanying notes to consolidated financial statements. 30 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Helen of Troy Limited, a Bermuda company, and its subsidiaries (the "Company") design, develop, import, and distribute hair care appliances, hairbrushes, combs, hair accessories and other personal care products. The Company purchases its products from unaffiliated manufacturers most of which are located in The People's Republic of China, Thailand, Taiwan and South Korea. The consolidated financial statements are prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (b) Consolidation The consolidated financial statements include the accounts of Helen of Troy Limited and its subsidiaries, including Tactica International, Inc. ("Tactica"), a subsidiary in which the Company acquired a 55 percent interest in fiscal 2001. The Company's consolidated net income includes and will continue to include one hundred percent of Tactica's net income or loss until such time as the minority interest in Tactica's accumulated deficit has been extinguished. Intercompany balances and transactions have been eliminated in consolidation. (c) Revenue recognition The Company recognizes revenues when it ships its product to customers. Customers at times request credits for returned product or in connection with incentives such as co-operative advertising agreements. The Company reduces sales or increases selling, general, and administrative expenses, depending on the nature of the credits, for estimated future credits to customers. Management bases such estimates either on historical information about credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. (d) Inventories The Company accounts for its inventory using a first-in-first-out system in which it records inventory on its balance sheet at the lower of its cost or its net realizable value. Determination of net realizable value requires management to estimate the point in time at which an item's value drops below its cost and the dollar amount of the item's net realizable value. The Company regularly reviews its inventory for slow-moving items and for items that it is unable to sell at prices above their original cost. When it identifies such an item, the Company reduces its book value to the amount that it expects to realize upon sale of that item. (e) Valuation of accounts receivable The allowance for doubtful accounts reflects the Company's best estimate of probable losses, determined principally on the basis of historical experience and specific allowances for known troubled accounts. (f) Property and equipment Property and equipment are stated at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. 31 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (g) License agreements A substantial majority of the Company's sales are made subject to license agreements with the licensors of the VS Sassoon(R), Revlon(R), Sunbeam(R) and Dr. Scholl's(R) trademarks. The Company amortizes the acquisition costs of the existing license agreements on a straight-line basis over the lives of the respective agreements. Net sales subject to license agreements comprised 55 percent, 72 percent, and 73 percent of total net sales for fiscal years 2002, 2001, and 2000, respectively. Royalty expense under the Company's license agreements is recognized as it is incurred. (h) Income taxes The Company uses the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax bases of various assets and liabilities. Generally, deferred tax assets represent future income tax reductions while deferred tax liabilities represent income taxes that the Company expects to pay in the future. The Company measures deferred tax assets and liabilities using enacted tax rates for the years in which it expects that temporary differences will reverse or be settled. Changes in tax rates affect the carrying values of deferred tax assets and liabilities. The effects of tax rate changes are recognized in the periods in which they are enacted. (i) Earnings per Share Basic earnings per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based upon the weighted average number of common shares plus the effects of potentially dilutive securities. The number of potentially dilutive securities was 1,109,900; 308,689; and 832,472 for fiscal years 2002, 2001, and 2000, respectively. Dilutive securities for the year ended February 28, 2002 consisted entirely of stock options. Dilutive securities for the years ended February 28, 2001 and February 29, 2000 included 258,084 and 739,615 shares, respectively, attributable to dilutive stock options, as well as 50,605 and 92,857 shares, respectively, contingently issuable as part of an acquisition. Options to purchase common stock that were outstanding but not included in the computation of earnings per share because the exercise prices of such options were greater than the average market price of the Company's common stock totaled 2,794,900; 4,319,762; and 3,786,612 for fiscal 2002, 2001, and 2000, respectively. (j) Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. (k) Foreign Currency Transactions The U.S. dollar is the Company's functional currency. All of Helen of Troy Limited's non-U.S. subsidiaries' transactions involving other currencies have been re-measured in U.S. dollars using average exchange rates for the months in which the transactions occurred. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net earnings. 32 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (l) Advertising Advertising costs are expensed in the fiscal year in which they are incurred. During the fiscal years ended February 28, 2002, February 28, 2001 and February 29, 2000, the Company charged $49,261,000, $31,675,000, and $18,527,000, respectively, of advertising costs to selling, general, and administrative expenses. (m) Warranties The Company's products are under warranty against defects in material and workmanship for a maximum of two years. The Company has established an accrual of approximately $3,428,000, $2,946,000 and $2,868,000 as of February 28, 2002, February 28, 2001 and February 29, 2000, respectively, to cover future warranty costs. (n) Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Intangible assets consist primarily of goodwill, license agreements and trademarks. The Company amortizes intangible assets using the straight-line method over appropriate periods ranging from five to forty years. The Company recorded amortization of intangible assets totaling $5,765,000, $5,292,000, and $4,527,000 during fiscal 2002, 2001, and 2000, respectively. The Company assesses the recoverability of goodwill by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. The discount rate used would be based on the Company's cost of capital. Beginning in fiscal 2003, the Company will apply the provisions of Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," in assessing the valuation of its goodwill. See the section of this footnote entitled "New Accounting Guidance" for a discussion of the implications of SFAS 142. (o) Interest Income Interest income is included in "Other income, net" on the Consolidated Statements of Income. Interest income totaled $727,000, $931,000, and $987,000 in fiscal 2002, 2001, and 2000, respectively. (p) Financial Instruments The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short maturity of these items. See note 4 for management's assessment of the fair value of the Company's guaranteed Senior Notes. 33 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (q) Stock-based Compensation Plans Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation expense for stock-based compensation plans at fair value. The Company has chosen to account for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the Company recognizes no expense in connection with its stock-based compensation plans, as all stock option grants are made at market value on the date of grant. Income tax benefits attributable to stock options exercised are credited to Additional paid-in capital. (r) New Accounting Guidance In April 2001, the Financial Accounting Standards Board's ("FASB's") Emerging Issues Task force ("EITF") reached consensus on EITF Issue 00-25 ("EITF 00-25"), "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer." EITF 00-25 requires vendors who offer certain allowances to customers to characterize those allowances as reductions of net sales, rather than as selling, general, and administrative expenses ("SG&A"). EITF 00-25 is applicable for fiscal quarters beginning after December 15, 2001 and requires restatement of prior periods if possible. Had the Company applied EITF 00-25 its net sales and SG&A in fiscal 2002, 2001, and 2000 would have decreased by $3,023,000, $2,672,000 and $1,665,000, respectively. EITF 00-25 will be applied beginning in fiscal 2003. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that an entity recognize all derivatives in its financial statements and measure those instruments at fair value. SFAS 133 was effective for fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133 did not affect the Company's Consolidated Financial Statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 is effective for the Company beginning March 1, 2002. It eliminates the amortization of goodwill and other indefinite intangible assets. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed by such analysis to be impaired is to be written down to its fair value. In complying with SFAS 142, the Company will review the goodwill on its Consolidated Balance Sheets to determine whether it is impaired. Fair values will be determined using discounted cash flow analysis. The Company estimates that the cumulative effect of adopting SFAS 142 will be a non-cash after-tax charge ranging from $15 million to $20 million in the first quarter of fiscal 2003. This amount will be recorded as a cumulative effect of an accounting change. Because it eliminates the amortization of goodwill, SFAS 142 will decrease the Company's SG&A expense by approximately $2,000,000 in fiscal 2003. 34 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
Estimated As of February 28, Useful Lives -------------------------- (Years) 2002 2001 ------------ ---------- ---------- Land -- $ 10,157 10,157 Building and improvements 20-40 29,315 29,242 Computer and other equipment 3 - 5 10,416 9,809 Transportation equipment 3 - 5 862 897 Furniture and fixtures 5- 15 6,964 6,791 ---------- ---------- 57,714 56,896 Less accumulated depreciation (11,998) (9,133) ---------- ---------- Property and equipment, net $ 45,716 47,763 ========== ==========
The Company recorded $2,865,000, $3,003,000, and $2,394,000 of depreciation expense for fiscal 2002, 2001, and 2000, respectively. Capital expenditures totaled $878,000, $1,351,000, and $8,340,000 in fiscal 2002, 2001, and 2000, respectively. The Company recognized a $650,000 impairment charge during fiscal 2000 and an additional $158,000 charge during the fourth quarter of fiscal 2001. These amounts represent the estimated excess of the carrying amount over the estimated net realizable value of the Company's former El Paso, Texas office facility and warehouse. The former office facility was sold during fiscal 2002, is classified as an asset held for sale and is included in the heading "Other assets" on the accompanying February 28, 2001 Consolidated Balance Sheet. The carrying value of the former warehouse is included in the heading "Other assets" on the accompanying February 28, 2002 and February 28, 2001 Consolidated Balance Sheets. During fiscal 2000 the Company capitalized $721,000 of interest in connection with the construction of a new office facility. No interest was capitalized in fiscal 2002 or fiscal 2001. The Company leases 108,000 square feet of warehouse space, as well as various administrative office spaces, from a real estate partnership in which the Chief Executive Officer and another member of the Board of Directors are limited partners. During fiscal 2002 the Company paid the real estate partnership $624,000 under these leases. 35 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) NOTES PAYABLE The Company maintains a revolving credit loan with a bank to facilitate short-term borrowings and the issuance of letters of credit. This line of credit allows borrowings totaling $25,000,000, charges interest at the three-month LIBOR rate plus a percentage that varies based on the ratio of the Company's debt to its earnings before interest, taxes, depreciation, and amortization (EBITDA), and expires August 31, 2003. At February 28, 2002 the interest rate charged under the line of credit was 2.89 percent. This line of credit allows for the issuance of letters of credit up to $7,000,000. Any outstanding letters of credit reduce the $25,000,000 maximum borrowing limit on a dollar-for-dollar basis. At February 28, 2002, there were no borrowings under this line of credit and outstanding letters of credit totaled $439,000. The revolving credit agreement provides that the Company must satisfy requirements concerning its minimum net worth, total debt to consolidated total capitalization ratio, debt to EBITDA ratio, and its fixed charge coverage ratio. The Company is in compliance with all of these requirements. (4) LONG-TERM DEBT On January 5, 1996, a U.S. subsidiary issued guaranteed Senior Notes at face value of $40,000,000. Interest is paid quarterly at a rate of 7.01%. The Senior Notes are unsecured, and are guaranteed by Helen of Troy Limited and certain of its subsidiaries. Annual principal payments of $10,000,000 each begin January 5, 2005, with the final payment due January 5, 2008. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Notes at February 28, 2002 is approximately $41,119,000. On July 18, 1997, a U.S. subsidiary of the Company issued a $15,000,000 Senior Note. Interest is paid quarterly at a rate of 7.24%. The $15,000,000 Senior Note is unsecured, is guaranteed by Helen of Troy Limited and certain of its subsidiaries and is due July 18, 2012. Annual principal payments of $3,000,000 each begin July 18, 2008, with the final payment due July 18, 2012. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Note at February 28, 2002 is approximately $15,818,000. Both the $40,000,000 and $15,000,000 Senior Notes contain covenants that require the Company to meet certain net worth and other financial requirements. Additionally, the notes restrict the Company from incurring liens on any of its properties, except under certain conditions as defined in the Senior Note agreements. The Company is in compliance with all the terms of these notes. 36 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES The components of earnings before income tax expense are as follows:
Years ended the last day of February ---------------------------------------- (in thousands) 2002 2001 2000 ---------- ---------- ---------- U.S $ 17,762 4,524 (5,725) Non-U.S 20,785 16,366 18,822 ---------- ---------- ---------- $ 38,547 20,890 13,097 ========== ========== ==========
The components of income tax expense (benefit) are as follows:
2002 2001 2000 ---------- ---------- ---------- Current U.S $ 6,252 2,990 (182) Non-U.S 1,689 2,716 1,280 Deferred 1,391 (2,148) (1,112) ---------- ---------- ---------- $ 9,332 3,558 (14) ========== ========== ==========
Total income tax expense differs from the amounts computed by applying the statutory tax rate to earnings before income taxes. The reasons for these differences are as follows:
Years ended the last day of February ---------------------------------------- (in thousands) 2002 2001 2000 ---------- ---------- ---------- Expected tax expense at the U.S. statutory rate of 35% $ 13,491 7,312 4,584 Decrease in income taxes resulting from income from non-U.S. operations subject to varying income tax rates (4,159) (3,754) (4,598) ---------- ---------- ---------- Actual tax expense $ 9,332 3,558 (14) ========== ========== ==========
37 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES, CONTINUED The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at February 28, 2002 and 2001 are as follows:
2002 2001 ---------- ---------- Deferred tax assets: (in thousands) Net operating loss carryforwards $ 1,510 1,615 Inventories, principally due to additional cost of inventories for tax purposes 2,164 1,287 Accrued expenses 2,246 3,557 Accounts receivable 2,679 2,926 ---------- ---------- Total gross deferred tax assets 8,599 9,385 Valuation allowance (1,076) (1,627) Deferred tax liabilities: Depreciation and amortization (1,796) (640) ---------- ---------- Net deferred tax asset $ 5,727 7,118 ========== ==========
The Company's U.S. net operating loss carryforward of $1,248,000 expires if not utilized by fiscal 2019. Accounting standards require that deferred income taxes reflect the tax consequences of future tax benefits, including net operating losses, to the extent that realization of such benefits is more likely than not. Certain of the Company's gross deferred tax assets did not, in the opinion of management, meet that standard as of February 28, 2002 and 2001. Therefore, the Company placed a valuation allowance against those assets. Although realization is not assured, management believes it is more likely than not that the remaining net deferred tax assets, including net operating losses, will be realized. The amount of the deferred tax assets considered realizable, however, could be lower if estimates of future taxable income during the carryforward period are reduced. The Hong Kong Inland Revenue Department ("the IRD") has assessed income tax on certain profits of the Company's foreign subsidiaries for the fiscal years 1990 through 1997. The ultimate resolution of the IRD's claims cannot be predicted with certainty. However, the Company has recorded a liability for the IRD's claims, based on consultations with outside Hong Kong tax experts as to the probability that some or all of the IRD's claims prevail. If the IRD's position were to prevail the resulting tax liability could total $30,520,000 (U.S.) for the period from fiscal 1990 through fiscal 2002. In connection with the IRD's tax assessment, the Company purchased tax reserve certificates in Hong Kong. The certificates were valued at $5,750,000 (U.S.) as of February 28, 2002. The $5,750,000 represented approximately 50 percent of the liability assessed by the IRD for fiscal 1990 through 1997. Tax reserve certificates represent the prepayment of potential tax liabilities by a taxpayer. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations. Although the ultimate resolution of the IRD's claims cannot be predicted with certainty, management believes that adequate provision has been made in the financial statements for the resolution of the IRD's claims. 38 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES, CONTINUED The Internal Revenue Service ("IRS") is examining the U.S. federal tax returns of the Company's largest domestic subsidiary for the fiscal years 1997, 1998 and 1999. To date, the IRS has proposed no adjustments. Although the ultimate outcome of the examination cannot be predicted with certainty, management is of the opinion that adequate provision has been made in the financial statements for the estimated effect of the examination. The Company plans to permanently reinvest all of the undistributed earnings of the non-U.S. subsidiaries of the U.S. subsidiaries. The Company has made no provision for U.S. federal income taxes on these undistributed earnings. At February 28, 2002, undistributed earnings for which the Company had not provided deferred U.S. federal income taxes totaled $50,244,000. (6) STOCK-BASED COMPENSATION PLANS The Company sponsors four stock-based compensation plans. The plans consist of two employee stock option plans, a non-employee director stock option plan and an employee stock purchase plan. These plans are described below. As all options were granted at or above market prices on the dates of grant, no compensation expense has been recognized for the Company's stock option plans or its stock purchase plan. Had the Company recorded compensation expense for its stock option plans based on the fair value of the options at the dates of grant for those awards, consistent with the method of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation," net income and earnings per share would have been reduced to the following pro forma amounts:
Years Ended the last day of February ---------------------------------------------------- 2002 2001 2000 -------------- -------------- -------------- Net Income: As Reported $ 29,215,000 17,332,000 13,111,000 Pro forma 21,799,000 12,502,000 5,054,000 Earnings per share: Basic: As Reported $ 1.04 .61 .45 Pro forma $ .78 .44 .17 Diluted: As Reported $ 1.00 .60 .44 Pro forma $ .75 .44 .17
The Company computed the pro forma figures disclosed above using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal 2002, 2001, and 2000, respectively; expected dividend yields of zero for all years; expected volatility of 40.8 percent for fiscal 2002, 34.9 percent for fiscal 2001, and 27.4 percent for fiscal 1999; risk-free interest rates of 4.7 percent for fiscal 2002, 4.9 percent for fiscal 2001, and 6.6 percent for fiscal 2000; and expected lives of 3, 4, 5 or 10 years depending on the option granted. 39 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK-BASED COMPENSATION PLANS, CONTINUED Under stock option and restricted stock plans adopted in 1994 and 1998 (the "1994 Plan" and the "1998 Plan," respectively) the Company reserved a total of 14,000,000 shares of its common stock for issuance to key officers and employees. Pursuant to the 1994 and 1998 Plans, the Company grants options to purchase its common stock at a price equal to or greater than the fair market value on the grant date. Both plans contain provisions for incentive stock options ("ISOs"), non-qualified stock options ("Non-Qs") and restricted stock grants. Generally, options granted under the 1994 and 1998 Plans become exercisable immediately, or over a one, four or five-year vesting period and expire on a date ranging from seven to ten years from their date of grant. Under a stock option plan for non-employee directors (the "Directors' Plan"), adopted in fiscal 1996, the Company reserved a total of 480,000 shares of its common stock for issuance to non-employee members of the Board of Directors. The Company grants options under the Directors' Plan at a price equal to the fair market value of the Company's common stock at the date of grant. Options granted under the Directors' Plan vest one year from their date of issuance and expire ten years after issuance. A summary of stock option activity under all plans is as follows:
Years Ended the last day of February ---------------------------------------------------------------------------------------- 2002 2001 2000 -------------------------- -------------------------- -------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average SHARES EXERCISE Shares Exercise Shares Exercise (000S) PRICE (000s) Price (000s) Price ---------- ---------- ---------- ---------- ---------- ---------- Options outstanding, beginning of year 6,203 $ 10.52 5,441 $ 11.96 4,393 $ 11.53 Options granted 1,353 10.26 1,273 5.95 1,386 12.16 Options exercised (108) 6.57 (12) 4.31 (146) 4.72 Options forfeited (125) 10.25 (499) 14.78 (192) 8.95 ---------- ---------- ---------- ---------- ---------- ---------- Options outstanding, at year end 7,323 10.53 6,203 10.52 5,441 11.96 ========== ========== ========== ========== ========== ========== Options exercisable at year-end 5,870 $ 9.96 4,362 $ 9.01 3,032 9.54 ========== ========== ========== ========== ========== ========== Weighted-average fair value of options granted during the year $ 5.72 $ 3.00 6.40
40 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK-BASED COMPENSATION PLANS, CONTINUED The following table summarizes information about stock options at February 28, 2002:
Outstanding Stock Options Exercisable Stock Options ---------------------------------------------------------------- --------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number of Contractual Exercise Number of Exercise Options Price Range Life (years) Price Options Price ----------- ---------------- ------------ ----------- ----------- ----------- ISOs 224,054 $4.13 to $6.35 6.30 $ 5.49 51,830 $ 4.69 173,077 $6.75 to $11.67 6.56 8.46 40,177 9.25 164,992 $12.13 to $23.91 4.71 13.66 74,241 14.10 ----------- ----------- Total 562,123 5.91 $ 8.80 166,248 $ 9.99 =========== =========== Non-Qs 2,834,272 $4.13 to $9.17 6.15 $ 5.64 2,763,072 $ 5.63 3,606,643 $10.00 to $20.00 7.24 14.49 2,700,669 14.09 ----------- ----------- Total 6,440,915 6.76 $ 10.59 5,463,741 $ 9.81 =========== =========== Directors' Plan 140,000 $4.41 to $10.75 8.35 $ 8.21 80,000 $ 7.78 180,000 $12.53 to $17.63 6.27 15.64 160,000 16.02 ----------- ----------- Total 320,000 7.18 $ 12.39 240,000 $ 13.28 =========== ===========
In fiscal 1999 the Company's shareholders approved an employee stock purchase plan (the "Stock Purchase Plan") under which 500,000 shares of common stock are reserved for issuance to the Company's employees, nearly all of whom are eligible to participate. Under the terms of the Stock Purchase Plan employees authorize the Company to withhold from 1 percent to 15 percent of their wages or salaries to purchase the Company's common stock. The purchase price for stock purchased under the plan is equal to the lower of 85 percent of the stock's fair market value on either the first day of each option period or the last day of each period. During fiscal 2002, employees purchased 22,341 shares of common stock from the Company under the stock purchase plan. 41 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) COMMITMENTS AND CONTINGENCIES The Company has employment contracts with certain of its officers. These agreements provide for minimum salary levels and potential incentive bonuses. One agreement automatically renews itself each month for a five year period and provides that in the event of a merger, consolidation or transfer of all or substantially all of the assets of the Company to an unaffiliated party, the officer may make an election to receive a cash payment for the balance of the obligations under the agreement. The expiration dates for these agreements range from March 15, 2003 to February 28, 2007. The aggregate commitment for future salaries pursuant to such contracts, at February 28, 2002, excluding incentive compensation, was approximately $4,000,000. Many of the license agreements under which the Company sells or intends to sell products with trademarks owned by other entities require the Company to pay minimum royalties, meet minimum sales volumes and make minimum levels of advertising expenditures. Minimum royalties due under these agreements during fiscal 2003 total $8,655,000. The Company purchases most of the appliances and products that it sells from unaffiliated manufacturers located in the Far East, principally in the Peoples' Republic of China, Thailand, Taiwan and South Korea. Due to the fact that most of its products are manufactured in the Far East, the Company is subject to risks associated with trade barriers, currency exchange fluctuations and political unrest. These risks have not historically affected the Company's operations. Additionally, the Company's management believes that it could obtain its products from facilities in other countries, if necessary. However, the relocation of production capacity could require substantial time and could result in increased costs. In the fourth quarter of fiscal 2001, the Company recorded a $2,457,000 charge for the remaining unamortized costs under a distribution agreement (which was later formally terminated) with The Schawbel Corporation ("Schawbel"), the supplier of the Company's butane hair care products. In a related matter, in September 1999, Schawbel commenced litigation in the U.S. District Court for the District of Massachusetts against The Conair Corporation ("Conair"), the predecessor distributor for Schawbel's butane products. In its action, amended in June 2000, Schawbel alleged, among other things, that Conair, following Schawbel's termination of the Conair distribution agreement, stockpiled and sold Schawbel product beyond the 120 day "sell-off" period afforded under the agreement, and manufactured, marketed and sold its own line of butane products which infringed patents held by Schawbel. In November 2000, the Massachusetts court granted Schawbel its request for preliminary injunction, and ordered that Conair cease selling all allegedly infringing products. The Company intervened as a plaintiff in the action to assert claims against Conair similar to the claims raised by Schawbel. The Company is seeking to recover damages in excess of $10 million, arising from the Company's inability to meet minimum purchase requirements under its distribution agreement with Schawbel and the subsequent termination of that agreement by Schawbel. Conair responded by filing a counterclaim alleging that the Company conspired with Schawbel to unlawfully terminate Conair's distribution agreement with Schawbel, and to disparage Conair's reputation in the industry. The counterclaim seeks $15 million in damages. Although the ultimate outcome of the matter cannot be predicted, the Company contends that Conair's counterclaims lack validity. The Company intends to pursue vigorously its claims and defense in the litigation. The Company is also involved in various other legal claims and proceedings in the normal course of operations. The Company is insured for substantially all of the various claims in which it is involved. In the opinion of management, the outcome of these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company and its subsidiaries. 42 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) COMMITMENTS AND CONTINGENCIES, CONTINUED Under the terms of a Shareholders' Rights Plan approved by the Board of Directors in fiscal 1999, the Board of Directors declared a dividend of one preference share right ("Right") for each outstanding share of Common Stock. The dividend resulted in no cash payment by the Company, created no liability on the part of the Company and did not change the number of shares of Common Stock outstanding. The Rights are inseparable from the shares of Common Stock and entitle the holders to purchase one one-thousandth of a share of Series A First Preference Shares ("Preference Shares"), par value $1.00, at a price of $100 per one-one thousandth of a Preference Share. Should certain persons or groups of persons ("Acquiring Persons") acquire more than 15% of the Company's outstanding Common Stock, the Board of Directors may either adjust the price at which holders of Rights may purchase Preference Shares or may redeem all of the then outstanding Rights at $.01 per Right. The Rights associated with the Acquiring Person's shares of Common Stock would not be exercisable. The Rights have certain anti-takeover effects. The Rights could cause substantial dilution to a person or group that attempts to acquire the Company in certain circumstances, but should not interfere with any merger or other business combination approved by the Board of Directors. The Rights expire December 1, 2008, unless their expiration date is advanced or extended or unless the Rights are earlier redeemed or exchanged by the Company. On September 29, 1999, the Company's Board of Directors approved a resolution authorizing the Company to purchase, in open market or private transactions, up to 3,000,000 shares of its common stock over a period extending to September 29, 2002. As of February 28, 2001, the Company had repurchased 1,342,431 of its shares under this resolution at a total cost of $8,699,000. The Company did not repurchase any of its Common Stock during fiscal 2002. (8) FOURTH QUARTER CHARGES/TRANSACTIONS In the fourth quarter of fiscal 2001, the Company recognized $2,457,000 in pre-tax charges due to the planned discontinuance of a product (see note 7). The Company's fourth quarter fiscal 2001 results also included a $1,895,000 reduction in SG&A due to the settlement of a license obligation for which the Company accrued a liability in fiscal 2000. During the fourth quarter of fiscal 2000 the Company recorded pre-tax charges of $10,624,000 related to the discontinuation of its artificial nails product line. The pre-tax charges resulting from such discontinuation included $2,669,000 for the write-down of artificial nails inventory. In addition, reserves for resolution of future contractual obligations, allowances for customer returns, and the write-off of related license costs, resulted in approximately $7,955,000 in fourth quarter 2000 charges. Also during the fourth quarter of fiscal 2000, the Company implemented several major organizational changes, resulting in fourth quarter charges of $770,000. These changes realigned organizational responsibilities, restructured various departments and streamlined certain functions within the Company. At February 29, 2000 accrued liabilities included approximately $8,000,000 related to these charges. The Company's fourth quarter fiscal 2002 results do not contain any transactions of a non-routine nature. 43 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data is as follows (in thousands, except per share amounts):
May August November February Total ----------- ----------- ----------- ----------- ----------- Fiscal 2002: Net sales $ 92,075 $ 113,482 $ 142,624 $ 103,068 $ 451,249 Gross profit 42,671 56,396 65,006 48,317 212,390 Net earnings 4,591 7,303 12,967 4,354 29,215 Earnings per Share Basic .16 .26 .46 .15 1.04 Diluted .16 .25 .44 .15 1.00 Fiscal 2001: Net sales $ 76,111 $ 88,233 $ 119,106 $ 77,948 $ 361,398 Gross profit 29,929 33,817 45,398 31,724 140,868 Net earnings 2,334 3,746 7,940 3,312(a) 17,332 Earnings per Share Basic .08 .13 .28 .12 .61 Diluted .08 .13 .28 .12 .60
The business of the Company is somewhat seasonal. Between 54 percent and 57 percent of annual sales volume normally occurs in the second and third fiscal quarters. (a) See note 8 regarding fourth quarter 2001 charges relating to the discontinuance of certain non-core products. 44 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) SEGMENT INFORMATION The following table contains segment information for fiscal 2002, 2001, and 2000.
(in thousands) North Corporate / American International Tactica Other Total ----------- ------------- ----------- ----------- ----------- 2002 Net sales $ 312,668 $ 29,906 $ 108,675 -- $ 451,249 Operating income (loss) 32,203 (244) 11,930 (2,232) 41,657 Identifiable assets 287,897 21,248 17,184 31,229 357,558 Capital / license expenditures 647 111 120 -- 878 Depreciation and amortization 6,665 1,442 256 267 8,630 2001 Net sales $ 311,998 $ 25,390 $ 24,010 -- $ 361,398 Operating income (loss) 28,736 94 (4,629) (1,205) 22,996 Identifiable assets 273,068 24,331 19,943 19,839 337,181 Capital / license expenditures 3,056 125 4 -- 3,185 Depreciation and amortization 7,537 372 228 -- 8,137 2000 Net sales $ 275,827 $ 23,686 -- -- $ 299,513 Operating income (loss) 9,857 835 -- (891) 9,801 Identifiable assets 264,460 20,231 -- 19,561 304,252 Capital / license expenditures 8,253 87 -- -- 8,340 Depreciation and amortization 6,025 896 -- -- 6,921
The operating income and loss totals for the North American segment include $233,000 of income for fiscal 2001 and a $10,801,000 loss for fiscal 2000, related to artificial nails products. The Company has discontinued production of artificial nails and is in the process of attempting to sell the remainder of its artificial nails inventory (see note 8). The Company recognized no significant income or loss on artificial nails in fiscal 2002. The North American segment sells hair care appliances, other personal care appliances, including massagers and spa products, hairbrushes, combs, and utility and decorative hair accessories in the U.S. and Canada. The International segment sells hair care appliances, personal care appliances, hairbrushes, combs, and hair accessories in other counties. Tactica sells a variety of personal care and other consumer products directly to customers and to retailers. 45 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) SEGMENT INFORMATION, CONTINUED Operating profit for each operating segment is computed based on net sales, less cost of goods sold, less any selling, general and administrative expenses associated with the segment. The selling, general, and administrative expense totals used to compute each segment's operating profit are comprised of SG&A expense directly associated with those segments, plus overhead expenses that are allocable to operating segments. Other items of income and expense, including income taxes, are not allocated to operating segments. The Company's domestic and international net revenues from third parties and long-lived assets are as follows:
2002 2001 2000 ---------- ---------- ---------- NET REVENUES FROM THIRD PARTIES: United States $ 408,990 323,330 264,238 International 42,259 38,068 35,275 ---------- ---------- ---------- Total 451,249 361,398 299,513 ========== ========== ========== LONG-LIVED ASSETS: United States 91,868 94,890 90,674 International 22,020 21,910 19,555 ---------- ---------- ---------- Total $ 113,888 116,800 110,229 ========== ========== ==========
Sales to one customer and its affiliate accounted for 22 percent, 23 percent, and 26 percent of the Company's net sales in fiscal 2002, 2001, and 2000, respectively. (11) ACQUISITIONS AND PURCHASES OF TRADEMARKS In December 1999, the Company entered into a long-term license with Sunbeam Products, Inc. to develop, market and distribute hair dryers and curling irons, hairsetters, styling products and hot air brushes under the Sunbeam(R) trade name in the U.S. and Canada. In January 2000 the Company acquired a long-term license from Sunbeam Products, Inc. to design, develop and sell human hair clippers and trimmers under the Sunbeam(R) trade name. At the same time Sunbeam Products, Inc. granted Helen of Troy a license to sell the same products under the Oster(R) trade name for a transitional period. In March 2000, the Company acquired a 55 percent ownership interest in Tactica International, Inc. ("Tactica") for $2,500,000. In addition, the Company loaned the minority shareholders of Tactica $3,500,000 on March 14, 2000. The interest rate on these loans is 8.75 percent. All principal and accrued interest on the loans is due March 14, 2005. Included in "Other assets" on the Company's February 28, 2002 and 2001 consolidated balance sheets are $4,103,000 and $3,826,000, respectively, related to the principal and accrued interest on these loans. The 45 percent interest held by other shareholders in Tactica's deficit appears as a reduction of the Company's stockholders' equity on the February 28, 2002 and 2001 consolidated balance sheets. The financial results of Tactica have been included in the accompanying financial statements of the Company, beginning March 14, 2000, the date of acquisition. It was not practical to develop pro forma information for the year ended February 29, 2000. The Company accounted for the Tactica acquisition using the purchase method of accounting. Acquisition costs in excess of the fair value of the net tangible assets acquired are included in goodwill. During fiscal 2002, the other shareholders of Tactica contributed $600,000 of cash to Tactica. 46 HELEN OF TROY LIMITED AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts Years ended February 28, 2002, February 28, 2001 and February 29, 2000 (in thousands)
Additions ---------------------------- Balance at Charged Write-off of Beginning to cost uncollectible Balance at Description of Year and expenses Recoveries accounts End of Year - ------------ ----------- ------------ ----------- ------------- ----------- Year ended February 28, 2002 Allowance for accounts receivable $ 4,081 $ 1,969 $ 22 $ 278 $ 5,794 Year ended February 28, 2001 Allowance for accounts receivable 2,514 2,469 63 965 4,081 Year ended February 29, 2000 Allowance for accounts receivable 1,756 2,554 64 1,860 2,514
47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 2002 fiscal year, is incorporated herein by reference in response to this Item 10. ITEM 11. EXECUTIVE COMPENSATION Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 2002 fiscal year, is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 2002 fiscal year, is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 2002 fiscal year, is incorporated herein by reference in response to this Item 13. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Memorandum of Association. (Filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on December 30, 1993). 3.2 Bye-Laws. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on December 30, 1993). 4.1 Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust and Savings Bank, as Rights Agent. (Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 4, 1998). 10.1 Vidal Sassoon, Inc. Amended License Agreement of December 22, 1982. (Filed as Exhibit 10.1 to the Helen of Troy Corporation's Registration Statement on Form S-2, File No. 2-82520, filed with the Securities and Exchange Commission on March 18, 1983). 10.2 Letter Agreements Amending Sassoon License Agreement. (Filed as Exhibit 10.2 to the Helen of Troy Corporation's Registration Statement on Form S-2, File No. 33-13253, filed with the Securities and Exchange Commission on April 8, 1987). 10.3 Form of Directors' and Executive Officers' Indemnity Agreement dated February 11, 1994 executed by each of Gerald J. Rubin, Robert D. Spear, Stanlee N. Rubin, Gary B. Abromovitz, Byron H. Rubin, Daniel C. Montano, and Christopher L. Carameros. (Filed as Exhibit 10.2 to the Registrants Registration Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on December 10, 1993). 10.4 1994 Stock Option and Restricted Stock Plan, as previously filed with the Registrants' Registration Statement on Form S-4, File No. 33-73594, as Exhibit 10.1 filed with the Securities and Exchange Commission on December 30, 1993, is hereby incorporated herein by reference. 10.5 Vidal Sassoon, Inc., European License Agreement, dated January 1, 1990. (Filed as Exhibit 10.25 to Helen of Troy Corporation's Annual Report on Form 10-K for the period ending February 28, 1990, filed with the Securities and Exchange Commission). 10.6 Revlon Consumer Products Corporation (RCPC) North American Appliances License Agreement dated September 30, 1992. (Filed as Exhibit 10.31 to Helen of Troy Corporation's Quarterly report on Form 10-Q for the period ending November 30, 1992 filed with the Securities and Exchange Commission). 10.7 Revlon Consumer Products Corporation (RCPC) International Appliances License Agreement dated September 30, 1992. (Filed as Exhibit 10.32 to Helen of Troy Corporation's Quarterly report on Form 10-Q for the period ending November 30, 1992 filed with the Securities and Exchange Commission). 10.8 Revlon Consumer Products Corporation (RCPC) North American Comb and Brush License 49 Agreement dated September 30, 1992. (Filed as Exhibit 10.33 to Helen of Troy Corporation's Quarterly report on Form 10-Q for the period ending November 30, 1992 filed with the Securities and Exchange Commission). 10.9 Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated September 30, 1992. (Filed as Exhibit 10.34 to Helen of Troy Corporation's Quarterly report on Form 10-Q for the period ending November 30, 1992 filed with the Securities and Exchange Commission). 10.10 First Amendment to RCPC North America Appliance License Agreement, dated September 30, 1992. (Filed as Exhibit 10.26 to Helen of Troy Corporation's Annual Report on Form 10-K for the period ending February 28, 1993 filed with the Securities and Exchange Commission). 10.11 First Amendment to RCPC North America Comb and Brush License Agreement, dated September 30, 1992. (Filed as Exhibit 10.27 to Helen of Troy Corporation's Annual Report on Form 10-K for the period ending February 28, 1993 filed with the Securities and Exchange Commission). 10.12 First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992. (Filed as Exhibit 10.28 to Helen of Troy Corporation's Annual Report on Form 10-K for the period ending February 28, 1993 filed with the Securities and Exchange Commission). 10.13 First Amendment to RCPC International Comb and Brush License Agreement, dated September 30, 1992. (Filed as Exhibit 10.29 to Helen of Troy Corporation's Annual Report on Form 10-K for the period ending February 28, 1993 filed with the Securities and Exchange Commission). 10.14 License Agreement between Helen of Troy Corporation and Helen of Troy Limited, a Barbados corporation, dated February 28, 1994. (Filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the period ending February 28, 1994 filed with the Securities and Exchange Commission). 10.15 Amended and Restated Note Purchase, Guaranty and Master Shelf Agreement, $40,000,000 7.01% Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility. (Filed as Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for the period ending November 30, 1996). 10.16 Helen of Troy Limited 1998 Employee Stock Option and Restricted Stock Plan. (Filed as Exhibit 4.3 to the Registrant's Registration Statement on Form S-8, File Number 333-67349, filed with the Securities and Exchange Commission on November 6, 1998). 10.17 Helen of Troy Limited 1998 Employee Stock Purchase Plan, as previously filed as Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, File Number 333-67369, filed with the Securities and Exchange Commission on November 6, 1998, is hereby incorporated herein by reference. 10.18 Amended and Restated Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated March 1, 1999. (Filed as Exhibit 10.29 to the Registrant's Quarterly Report on Form 10-Q for the period ending August 31, 1999). 10.19 Amended and Restated Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan. (Filed as Exhibit 10.30 to the Registrant's Quarterly Report on Form 10-Q for the period ending August 31, 1999). 50 10.20 Loan Agreement, dated December 31, 1996, between Helen of Troy L.P., and Texas Commerce Bank National Association. 10.21 First Amendment, dated July 31, 1997, to Loan Agreement between Helen of Troy L.P. and Texas Commerce Bank National Association. 10.22 Second Amendment, dated July 31, 1998, to Loan Agreement, between Helen of Troy L.P. and Chase Bank of Texas National Association. 10.23 Third Amendment, dated July 31, 2000, to Loan Agreement, between Helen of Troy L.P. and The Chase Manhattan Bank. 10.24 Fourth Amendment, dated July 31, 2001, to Loan Agreement, between Helen of Troy L.P. and The Chase Manhattan Bank. 10.25 Fifth Amendment, dated August 31, 2001 to Loan Agreement, between Helen of Troy L.P. and The Chase Manhattan Bank. 10.26* Helen of Troy 1997 Cash Bonus Performance Plan, filed herewith. 10.27* Stockholders Agreement dated March 14, 2000 by and among Tactica International, Inc., Helen of Troy, LLC, Avi Sivan, Prem Atma Ramchandani, Avraham Ovadia, and APA International, LLC., filed herewith. 21* Subsidiaries of the Registrant, filed herewith. 23* Independent Auditors' Consent, filed herewith. *filed herewith (b) The following documents are filed as part of the report: 1. Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Schedule: Schedule II - Valuation and Qualifying Accounts (c) Reports on Form 8-K The Company filed a report on Form 8-K January 25, 2002 containing its press release dated January 23, 2002 discussing the effect on the Company of the Kmart bankruptcy filing and reaffirming earnings expectations for fiscal 2002. 51 The registrant will send its annual report to security holders and proxy solicitation material subsequent to the filing of this form and shall furnish copies of both to the Commission when they are sent to security holders. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HELEN OF TROY LIMITED By: /s/ Gerald J. Rubin ------------------------------------ Gerald J. Rubin, Chairman, Chief Executive Officer and Director Dated May 24, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Chairman of the Board, Chief Executive Officer, President, and /s/ Gerald J. Rubin Director (Principal Executive Officer) May 24, 2002 - ---------------------------------------- (Gerald J. Rubin) Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting /s/ Russell G. Gibson Officer) May 24, 2002 - ---------------------------------------- (Russell G. Gibson) /s/ Stanlee N. Rubin Director May 24, 2002 - ---------------------------------------- (Stanlee N. Rubin) /s/ Christopher L. Carameros Director May 24, 2002 - ---------------------------------------- (Christopher L. Carameros)
52 /s/ Byron H. Rubin Director May 24, 2002 - ---------------------------------------- (Byron H. Rubin) Director - ---------------------------------------- (Daniel C. Montano) /s/ Gary B. Abromovitz Deputy Chairman of the Board May 24, 2002 - ---------------------------------------- and Director (Gary B. Abromovitz)
53 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.26 - Helen of Troy 1997 Cash Bonus Performance Plan, filed herewith. 10.27 - Stockholders Agreement dated March 14, 2000 by and among Tactica International, Inc., Helen of Troy, LLC, Avi Sivan, Prem Atma Ramchandani, Avraham Ovadia, and APA International, LLC., filed herewith. 21 - Subsidiaries of the Registrant, filed herewith. 23 - Independent Auditors' Consent, filed herewith.
54 EX-10.26 3 d97329exv10w26.txt 1997 CASH BONUS PERFORMANCE PLAN EXHIBIT 10.26 HELEN OF TROY 1997 CASH BONUS PERFORMANCE PLAN Section 1. PURPOSE OF PLAN The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing to the participating executives of the Company and its Subsidiaries bonus incentives that qualify as performance-based compensation within the meaning of Section 162(m) of the Code. Subject to the approval of the shareholders of the Company, the Plan shall be effective as of March 1, 1997. Section 2. DEFINITIONS AND TERMS 2.1. Accounting Terms. Except as otherwise expressly provided or the context otherwise requires, financial and accounting terms are used as defined for purposes of, and shall be determined in accordance with, GAAP. 2.2. Specific Terms. The following words and phrases as used herein shall have the following meanings: "Base Salary" with respect to any Performance Period means the aggregate base salary of an Executive for that Performance Period. "Bonus" means a cash payment or payment opportunity as a context requires. "Business Criteria" means any one or any combination of financial goals or other objective goals, which may be Company-wide, on an individual basis or otherwise, and (i) with respect to financial goals, may be expressed, for example, in terms of Net Income, EPS, ECO, cash flow, Return on Equity, Return on Assets or other return ratios, or stock price of the Company, and (ii) with respect to objective goals, may include the attainment of various productivity and long term growth objectives, including for example, reductions in the Company's overhead ratio and expenses to sales ratios. "CEO" means Gerald J. Rubin. "Change in Control" shall mean to have occurred at such time as either (i) any "person", as such term is used in section 14(d) of the Exchange Act, other than the Company, a wholly-owned Subsidiary of the Company or any employee benefit plan of the Company, or its Subsidiaries, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act (or any successor rule), directly or indirectly, of fifty percent (50%) or more of the combined voting power of the Company's common stock, or (ii) individuals who constitute the Board of the Directors on the effective date of this Plan (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders was approved by a vote of at least three quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for the director without objection to such nomination) shall be, for purposes of this clause (ii) considered as though such person was a member of the Incumbent Board. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee" means the Stock Option and Compensation Committee of the Company which has been established to administer the Plan in accordance with Section 3.1 and Section 162(m) of the Code. "Company" means Helen of Troy Limited, a Bermuda company, and any successor whether by merger, ownership or all or substantially all of its assets or otherwise. 1 "Disability" shall have such meaning attributed thereto in the Company's long-term disability plan, or, if no such plan exists, shall mean a "Permanent and Total Disability" as defined in Code Section 22(e). "ECO" shall mean the sum of (i) the consolidated earnings from continuing operations before all income taxes of the Company and its Subsidiaries for each Year, (ii) minus extraordinary income, plus extraordinary expenses (as defined by GAAP), and (iii) minus capital gains, plus capital losses (as defined by GAAP). "EPS" for any Year means earnings per share of the Company as reported in the Company's Consolidated Statement of Income set forth in the audited consolidated financial statements of the Company for the Year. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and as interpreted by the rules and regulations promulgated thereunder. "Executive" means a key employee (including any officer) of the Company or the Subsidiaries. "GAAP" shall mean generally accepted accounting principles used and applied in the United States of America. "Net Income" for any Year means the consolidated net income of the Company as reported in the audited consolidated financial statements of the Company for the Year. "Participant" means an Executive selected to participate in the Plan by the Committee. "Performance Period" means the Year or Years with respect to which the Performance Targets are set by the Committee. "Performance Target(s)" means the specific objective goal or goals (which may be cumulative and/or alternative) that are timely set in writing by the Committee for each Executive for the Performance Period with respect to any one or more of the Business Criteria. "Plan" means the Helen of Troy 1997 Cash Bonus Performance Plan as amended from time to time. "Return on Assets" means Net Income divided by the average of the total assets of the Company at the end of the fiscal quarters of the Year as reported by the Company in its consolidated financial statements. "Return on Equity" means the Net Income divided by the average of the common shareholders equity of the Company at the end of each of the fiscal quarters of the Year as reported by the Company in its consolidated financial statements. "Section 162(m)" means Section 162(m) of the Code, and the regulations promulgated thereunder, all as amended from time to time. "Subsidiary" means any corporation, partnership or other entity as to which more than fifty percent (50%) of the voting securities or other voting ownership interests shall now or hereafter be owned or controlled, directly by a person, any Subsidiary of such person, or any Subsidiary of such Subsidiary. "Year" means any one or more fiscal years of the Company commencing on or after March 1, 1997, that represent(s) the applicable Performance Period. 2 Section 3. ADMINISTRATION OF THE PLAN 3.1. The Committee. The Plan shall be administered by a Committee consisting solely of at least two members of the Board of Directors of the Company, duly authorized by the Board of Directors of the Company to administer the Plan, who (i) are not eligible to participate in the Plan and (ii) are "outside directors" within the meaning of Section 162(m). 3.2. Powers of the Committee. The Committee shall have the sole authority to establish and administer the Performance Target(s) and, subject to the right of the CEO to participate in the Plan, the responsibility of determining from among the Executives those persons who will participate in and receive Bonuses under the Plan and, subject to Sections 4 and 5 of the Plan, the amount of such Bonuses and shall otherwise be responsible for the administration of the Plan, in accordance with its terms. The Committee shall have the authority to construe and interpret the Plan (except as otherwise provided herein) and any agreement or other document relating to any Bonus under the Plan, may adopt rules and regulations governing the administration of the Plan, and shall exercise all other duties and powers conferred on it by the Plan, or which are incidental or ancillary thereto. Subject to the right of the CEO to participate in the Plan as provided in Section 4.4, for each Performance Period, the Committee shall determine, at the time the Business Criteria and the Performance Target(s) are set, those Executives who are selected as Participants in the Plan. The Board of Directors shall be entitled, in its sole discretion, to approve or disapprove, but not amend, any proposed Performance Target and Performance Period established by the Committee with respect to any Participant. Absent any disapproval by the Board of Directors of the proposed Performance Target and Performance Period, the Committee's establishment of such Performance Target and Performance Period shall become effective. 3.3. Requisite Action. A majority (but not fewer than two) of the members of the Committee shall constitute a quorum. The vote of a majority of those present at a meeting at which a quorum is present or the unanimous written consent of the Committee shall constitute action by the Committee. 3.4. Express Authority (and Limitations on Authority) to Change Terms and Conditions of Bonus. Without limiting the Committee's authority under other provisions of the Plan, but subject to any express limitations of the Plan and Section 5.8, the Committee shall have the authority to accelerate a Bonus (after the attainment of the applicable Performance Target(s)) and to waive restrictive conditions for a Bonus (including any forfeiture conditions, but not Performance Target(s)), in such circumstances as the Committee deems appropriate. In the case of any acceleration of a Bonus after the attainment of the applicable Performance Target(s), the amount payable shall be discounted to its present value using an interest rate equal to Moody's Average Corporate Bond Yield of the month preceding the month in which such acceleration occurs. Section 4. BONUS PROVISIONS 4.1. Provision for Bonus. Each Participant may receive a Bonus if and only if the Performance Target(s) established by the Committee, relative to the applicable Business Criteria, are attained. The applicable Performance Period and Performance Target(s) shall be determined by the Committee consistent with the terms of the Plan and Section 162(m). 4.2. Preestablished Performance Target for CEO. Subject to Sections 4.1, 4.8, 5.1 and 5.8, with respect to the CEO, the preestablished Performance Target for each Year during the term of the Plan, and related Bonus for the CEO, shall be based on the Adjusted ECO (as herein defined below) for such Year. For each Year during the term of the Plan, the CEO shall receive a Bonus equal to five percent (5%) of the Adjusted ECO less the CEO's Base Salary for such Year. The Adjusted ECO, for the purpose of computing the Bonus payable to the CEO under the provisions hereof, shall be determined in accordance with GAAP applied on a consistent basis, commencing as of the Year beginning March 1, 1997 and continuing each Year thereafter though the date of termination of the Plan. For purposes hereof, the term "Adjusted ECO" for any Year shall mean the ECO for such Year plus the Bonus to the CEO under this Section 4.2 in respect of such Year and any incentive bonus for such Year for Aaron M. Shenkman. 4.3. Selection of Performance Target(s) for Participants other than CEO. The specific Performance Target(s) with respect to the Business Criteria must be established by the Committee in advance of the deadlines applicable 3 under Section 162(m) and while the performance relating to the Performance Target(s) remains substantially uncertain within the meaning of Section 162(m). With respect to the Participants other than the CEO, at the time the Performance Target(s) are selected, the Committee shall provide, in terms of an objective formula or standard for each such Participant, and for any person who may become a Participant after the Performance Target(s) are set, the method of computing the specific amount that will represent the maximum amount of Bonus payable to such Participant if the Performance Target(s) are attained, subject to Sections 4.1, 4.8, 4.11, 5.1 and 5.8. 4.4. Selection of Participants. During the term of the Plan, the CEO shall be a Participant under the Plan. With respect to Executives other than the CEO, for each Performance Period, the Committee shall determine, at the time the Business Criteria and the Performance Target(s) are set, those other Executives who will participate in the Plan. 4.5. Effect of Mid-Year Commencement of Service. To the extent compatible with Sections 4.3 and 5.8, if services as an Executive commence after the adoption of the Plan and the Performance Target(s) are established for a Performance Period, the Committee may grant a Bonus that is proportionately adjusted based on the period of actual service during the Year; the amount of any Bonus paid to such person shall not exceed that proportionate amount. 4.6. Termination of Employment During Year. Unless otherwise determined by the Committee or required by applicable law or pursuant to any written agreement between the Company and the Executive: (a) no Bonus shall be payable to an Executive if the Executive is not employed by the Company or any Subsidiary of the Company on the last day of the Performance Period for which the Bonus is otherwise payable, unless the Executive's employment with the Company and its Subsidiaries terminates during the Performance Period by reason of the Executive's death or Disability or following a Change in Control, and (b) in the event of the Executive's death or Disability during the Performance Period, or in the event of the termination of the Executive's employment for any reason following a Change in Control that occurs during the Performance Period, the Executive (or the Executive's legal representative or beneficiary) shall receive a Bonus equal to the product of (i) the Bonus he would have received for the entire Performance Period, multiplied by (ii) a fraction, the numerator of which is the number of days during the Performance Period in which the Executive was an employee of the Company or its Subsidiaries, and the denominator of which is the number of days in the Performance Period. Payment of such Bonus shall be made in accordance with Section 4.10 hereof. In the event of any conflict between the terms of any written agreement between the Company and the Executive and this Plan regarding the payment of the Bonus upon termination of employment with the Company, the terms of the written agreement shall be deemed to control. 4.7. Accounting Changes. Subject to Section 5.8, if, after the Performance Target(s) are established for a Performance Period, a change occurs in the applicable accounting principles or practices, the amount of the Bonuses paid under this Plan for such Performance Period shall be determined without regard to such change. 4.8. Committee Discretion to Determine Bonuses. With respect to Participants other than the CEO, the Committee has the sole discretion to determine the standard or formula pursuant to which each such Participant's Bonus shall be calculated (in accordance with Section 4.3), subject in all cases to the terms, conditions and limits of the Plan and of any other written commitment authorized by the Committee. To this same extent, with respect to Participants other than the CEO, the Committee may at any time establish additional conditions and terms of payment of Bonuses (including, but not limited to the achievement of other financial, strategic or individual goals, which may be objective or subjective) as it may deem desirable in carrying out the purposes of the Plan and may take into account such other factors as it deems appropriate in administering any aspect of the Plan. The Committee may not, however, increase the maximum amount permitted to be paid to any individual under Section 4.2, 4.3 or 4.11 of the Plan or award a Bonus under this Plan if the applicable Performance Target(s) have not been satisfied. 4 4.9. Committee Certification. No Executive shall receive any payment under the Plan unless the Committee has certified, by resolution or other appropriate action in writing, that the amount thereof has been accurately determined in accordance with the terms, conditions and limits of the Plan and that the Performance Target(s) and any other material terms previously established by the Committee or set forth in the Plan were in fact satisfied. 4.10. Time of Payment. Any Bonuses granted by the Committee under the Plan shall be paid as soon as practicable following the Committee's determinations under this Section 4 and the certification of the Committee's findings under Section 4.9. Any such payment shall be in cash or cash equivalents, subject to applicable withholding requirements. If and to the extent permitted by the Committee, and in accordance with such rules as the Committee may from time to time adopt, Participants may, prior to the beginning of any Performance Period, elect to defer the payout of all or any portion of a Bonus relating to such Performance Period. In the case of the delay of a Bonus otherwise payable at or after the attainment and certification of the applicable Performance Target(s), any additional amount payable shall be based on Moody's Average Corporate Bond Yield over the deferral period. 4.11. Maximum Individual Bonus. Notwithstanding any other provision hereof, with respect to Executives other than the CEO, no such Executive shall receive a Bonus under the Plan for any fiscal year in excess of $1,000,000. Section 5. GENERAL PROVISIONS 5.1. No Right to Bonus or Continued Employment. Neither the establishment of the Plan nor the provision for or payment of any amounts hereunder nor any action of the Company (including, for purposes of this Section 5.1, any predecessor or Subsidiary), the Board of Directors of the Company or the Committee in respect of the Plan, shall be held or construed to confer upon any person any legal right to receive, or any interest in, a Bonus or any other benefit under the Plan, or any legal right to be continued in the employ of the Company. The Company expressly reserves any and all rights to discharge an Executive in its sole discretion, without liability of any person, entity or governing body under the Plan or otherwise, except to the extent otherwise provided in any written employment agreement between the Company and the Executive. 5.2. Discretion of the Company, Board of Directors and Committee. Any decision made or action taken by the Company or by the Board of Directors of the Company or by the Committee arising out of or in connection with the creation, amendment, construction, administration, interpretation and effect of the Plan shall be within the absolute discretion of such entity and shall be conclusive and binding upon all persons. No member of the Committee shall have any liability for actions taken or omitted under the Plan by the member or any other person. 5.3. Absence of Liability. A member of the Board of Directors of the Company or a member of the Committee or any officer of the Company shall not be liable for any act or inaction hereunder, whether of commission or omission. 5.4. No Funding of Plan. The Company shall not be required to fund or otherwise segregate any cash or any other assets which may at any time be paid to Participants under the Plan. The Plan shall constitute an "unfunded" plan of the Company. The Company shall not, by any provisions of the Plan, be deemed to be a trustee of any property, and any obligations of the Company to any Participant under the Plan shall be those of a debtor and any rights of any Participant or former Participant shall be limited to those of a general unsecured creditor. 5.5. Non-Transferability of Benefits and Interests. Except as expressly provided by the Committee, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such attempted action shall be void and no such benefit shall be in any manner liable for or subject to debts, contracts, liabilities, engagements or torts of any Participant or former Participant. This Section 5.5 shall not apply to an assignment of a contingency or payment due after the death of the Executive to the deceased Executive's legal representative or beneficiary. 5 5.6. Law to Govern. All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Texas. 5.7. Non-Exclusivity. Subject to Section 5.8, the Plan does not limit the authority of the Company, the Board or the Committee, or any Subsidiary of the Company, to grant awards or authorize any other compensation under any other plan or authority, including, without limitation, awards or other compensation based on the same Performance Target(s) used under the Plan. In addition, Executives not selected to participate in the Plan may participate in other plans of the Company. 5.8. Section 162(m) Conditions; Bifurcation of Plan. It is the intent of the Company that the Plan and Bonuses paid hereunder satisfy and be interpreted in a manner, that, in the case of Participants who are or may be persons whose compensation is subject to Section 162(m), satisfies any applicable requirements as performance-based compensation. Any provision, application or interpretation of the Plan inconsistent with this intent to satisfy the standards in Section 162(m) of the Code shall be disregarded. Notwithstanding anything to the contrary in the Plan, the provisions of the Plan may at any time be bifurcated by the Board or the Committee in any manner so that certain provisions of the Plan or any Bonus intended or required in order to satisfy the applicable requirements of Section 162(m) are only applicable to persons whose compensation is subject to Section 162(m). Section 6. EFFECTIVE DATE, AMENDMENTS, SUSPENSION OR TERMINATION OF PLAN The Plan shall be effective as of March 1, 1997, subject to its approval by shareholders of the Company at the annual meeting of shareholders to be held August 26, 1997, or any adjournment or postponement thereof. The Board of Directors or the Committee may from time to time amend, suspend or terminate in whole or in part, and if suspended or terminated, may reinstate, any or all of the provisions of the Plan. Notwithstanding the foregoing, no amendment may be effective without Board of Directors and/or shareholder approval if such approval is necessary to comply with the applicable rules under Section 162(m) of the Code. No additional Bonuses may be payable after termination of the Plan. Termination of the Plan shall not affect any Bonuses due and outstanding on the date of termination and such Bonuses shall continue to be subject to the terms of the Plan notwithstanding its termination. 6 EX-10.27 4 d97329exv10w27.txt STOCKHOLDERS AGREEMENT DATED MARCH 14, 2000 EXHIBIT 10.27 STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "Agreement") is entered into effective as of March 14, 2000, by and among Tactica International, Inc., a Nevada corporation ("Company"), Helen of Troy, LLC, a Nevada limited liability company ("HoT"), Avi Sivan ("Sivan"), Prem Atma Ramchandani ("Ramchandani"), Avraham Ovadia ("Ovadia"), APA International, LLC, a Delaware limited liability company ("APA," together with Sivan, Ramchandani and Ovadia, the "Founding Group") and each other holder of record of Securities (as defined in Article 1 below) who has executed this Agreement or a separate agreement to be bound by the terms of this Agreement, whether such separate agreement is executed on the date of this Agreement or some earlier or later date (HoT, the members of the Founding Group and such other holders of record of Securities are sometimes referred to in this Agreement collectively as the "Stockholders" and each individually as a "Stockholder"). PRELIMINARY STATEMENTS A. The Stockholders own Securities. B. The Company and the Stockholders have agreed to impose certain restrictions on the transferability of the Securities. C. The Stockholders have agreed to vote their Securities in accordance with the terms set forth in this Agreement. D. The parties hereto have agreed to certain other matters provided in this Agreement. AGREEMENT The parties, intending to be legally bound, agree as follows: 1. CERTAIN DEFINITIONS. As used herein, the following terms shall have the respective meanings indicated: "Affected Stockholder" means any Stockholder who undergoes a Buyout Event or Buy Back Event, as the case may be. "Affiliate" has the meaning provided in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "Agreement" shall have the meaning provided in the introductory paragraph of this Agreement. "Appraised Value" means, as to any Securities or non-monetary consideration, the fair market value of such Securities or non-monetary consideration as determined by an Independent Financial Expert selected by the board of directors of the Company; provided, however, if the Subject Stockholder shall object to such determination within ten days after being notified thereof by the Company, such Subject Stockholder shall within such ten-day period select an Independent Financial Expert to determine the fair market value of such Securities or non-monetary consideration on behalf of the Subject Stockholder. In the event that the Independent Financial Experts selected by the Company, on the one hand, and the Subject Stockholder on the other hand, cannot agree on the fair market value of such Securities or non-monetary consideration, then the two Independent Financial 1 Experts shall mutually select a third Independent Financial Expert to determine the fair market value of such Securities or non-monetary consideration, and the value selected by such third firm shall be binding on all of the parties hereto. Each such Independent Financial Expert may use any customary method of determining fair market value. The cost of the Independent Financial Expert selected by the Company shall be paid by the Company (unless the Subject Stockholder accepts the determination of the Company's Independent Financial Expert, in which event such Subject Stockholder shall pay one-half the cost of such expert or, if there is more than one such Subject Stockholder, such cost shall be allocated equally among all such Subject Stockholders), the cost of the Independent Financial Expert, if any, selected by the Subject Stockholder shall be paid by such Subject Stockholder, and the cost of the Independent Financial Expert, if any, mutually selected by the two Independent Financial Experts appointed by the Company, on the one hand, and the Subject Stockholder on the other hand, shall be paid one-half by the Company and one-half by such Subject Stockholder. Notwithstanding the foregoing, the Company, HoT and the Subject Stockholder may determine the Appraised Value without retaining an Independent Financial Expert, which determination shall be binding upon all of the parties hereto. Notwithstanding anything herein to the contrary, any calculation of Appraised Value of Securities shall be made (a) based on what on willing buyer and willing seller not under compulsion to sell or buy would pay for such Securities and further assuming all of the Company's securities are sold in a single transaction and/or (b) without consideration of a minority discount or any restrictions applicable to such Securities under this Agreement. Notwithstanding anything herein to the contrary, upon a rescission of a Call or Put pursuant to Sections 4.1(c) or 4.2(c) respectively, the party or parties rescinding such election shall be responsible for all costs of all Independent Financial Experts and shall reimburse all costs of Independent Financial Experts borne by the Company and the other parties in determining the Appraised Value. "Associate" has the meaning provided in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "Average Trading Price" means the average of the closing sale price of a share of Parent Common Stock on Nasdaq, as reported by Nasdaq, for the 20 consecutive trading days ending one trading day immediately preceding the date of the Exit Exchange Closing. "Bankrupt Stockholder" means any Stockholder (a) that (i) makes a general assignment for the benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes the subject of an order for relief or is declared insolvent in any federal or state bankruptcy or insolvency proceedings; (iv) files a petition or answer seeking for such Stockholder a reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any law; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Stockholder in a proceeding of the type described in subclauses (i) through (v) of this clause (a); or (vi) seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of such Stockholder's or of all or any substantial part of such Stockholder's properties; or (b) against which, a proceeding seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any law has been commenced and 120 days have expired without dismissal thereof or with respect to which, without such Stockholder's consent or acquiescence, a trustee, receiver, or liquidator of such Stockholder or of all or any substantial part of such Stockholder's properties has been appointed and 90 days have expired without the appointment's having been vacated or stayed, or 90 days have expired after the date of expiration of a stay, if the appointment has not previously been vacated. "Buy Back Closing" shall have the meaning provided in Section 8.3. "Buy Back Event" shall have the meaning provided in Section 8.1. 2 "Buyout Closing" shall have the meaning provided in Section 5.7. "Buyout Event" means (a) the death of a Stockholder, (b) any event in which a Stockholder becomes a Bankrupt Stockholder or (c) the divorce or other termination of the marital relationship of a Stockholder or the death of a spouse of a Stockholder and, in connection therewith, such Stockholder does not succeed to, or otherwise acquire, such Securities of such spouse. "Call" shall have the meaning provided in Section 4.1. "Call Notice" shall have the meaning provided in Section 4.1. "Closing" shall have the meaning provided in Section 2.7. "Common Stock" means the Company's Common Stock, par value $.01 per share, and shares of stock or other securities of any class resulting from the reclassification, split, combination or other change thereof, dividends of securities paid thereon and securities of any other issuer received in exchange for such Common Stock in connection with any merger, consolidation, reorganization or acquisition involving the Company. "Common Stock Equivalents" means, at any time, rights, warrants, options, convertible securities or indebtedness, exchangeable securities or indebtedness, or other rights, which, at such time, are exercisable for or convertible or exchangeable into, directly or indirectly, Common Stock and securities immediately convertible into Common Stock at such time, such Common Stock Equivalents being measured for purposes of this Agreement by the number of shares of Common Stock that a Stockholder is entitled to acquire pursuant to the terms thereof at the time in question. "Company" shall have the meaning provided in the introductory paragraph of this Agreement. "Compelled Sale Transfer Notice" shall have the meaning provided in Section 6.2. "Compelled Sale Transfer Offer" shall have the meaning provided in Section 6.1. "Consolidated" shall mean when used with reference to any financial term in this Agreement, the amounts signified by such term for all the Company and its subsidiaries determined on a consolidated basis in accordance with GAAP. Unless otherwise specified herein, references to "consolidated" financial statements or data of the Company includes consolidation with its subsidiaries in accordance with GAAP. "Control Transfer" shall have the meaning provided in Section 6.1. "Disposition" means any sale, transfer, encumbrance, gift, donation, assignment, pledge, hypothecation or other disposition of any Securities or any interest therein, whether voluntary or involuntary, and whether during a Stockholder's lifetime or upon or after his death, including, but not limited to, any Disposition by operation of law, by court order, by judicial process or by foreclosure, levy or attachment. "Disposition Notice" shall have the meaning provided in Section 2.1. "Exchange" shall have the meaning provided in Section 9.1. "Exchanging Stockholder" shall have the meaning provided in Section 9.1. 3 "Exchange Percentage" means the quotient, when expressed as a percentage, equal to (a) the number of Securities of the Exchanging Stockholders subject to an Exit Notice for which Parent has elected to purchase pursuant to Section 9.2, divided by (b) the total number of Securities of the Exchanging Stockholders subject to such Exit Notice. "Exit Exchange Closing" shall have the meaning provided in Section 9.3. "Exit Notice" shall have the meaning provided in Section 9.1. "Exit Transaction" means the sale of the Company pursuant to which any Person or group (as defined under Section 3(d)(3) of the Securities Exchange Act) of Persons acquires (a) 100% of the outstanding Securities of the Company or (b) all or substantially all of the Company's assets, in each case whether accomplished directly or indirectly and whether accomplished by purchase of Securities, asset purchase, merger, recapitalization, reorganization or other transaction; provided, however, a Exit Transaction shall not be deemed to include a Control Transfer, which shall be governed by Article 6. "Exit Transaction Notice" shall have the meaning provided in Section 7.2. "Founding Group" shall have the meaning provided in the introductory paragraph of this Agreement. "Founding Group Pledge Agreements" means those certain Pledge Agreements dated on or about the date hereof by and between HoT and each member of the Founding Group, pursuant to which the Securities held by such members have been pledged to HoT as security for indebtedness owing by such member of the Founding Group to HoT. "Full Buyout Purchaser" shall have the meaning provided in Section 5.5. "Full Founding Group Buyout Purchaser" shall have the meaning provided in Section 5.3. "Full Founding Group Purchaser" shall have the meaning provided in Section 2.2. "Full Purchaser" shall have the meaning provided in Section 2.4. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "HoT" shall have the meaning provided in the introductory paragraph of this Agreement. "Independent Financial Expert" means any reputable investment bank, accounting firm, or appraiser which (a) is experienced in making determinations such as the Appraised Value, (b) does not (and whose directors, officers, employees, Affiliates and stockholders do not) have a material direct or indirect financial interest in the Company or any Stockholder or in any Affiliate of the Company or any Stockholder, (c) has not been, and at the time it is called upon to give independent financial advice to the Company or any Stockholder, is not (and none of whose directors, officers, employees, Affiliates or stockholders is) a promoter, director, or officer of the Company or any Stockholder or any Affiliate of the Company or any Stockholder and (d) does not provide any advice or opinions to the Company or any Stockholder or any Affiliate of the Company or any Stockholder except as an Independent Financial Expert. The Independent Financial Expert may be compensated by the Company and/or any Stockholder for opinions or services it provides as an Independent Financial Expert. 4 "Loan Agreement" means that certain Loan Agreement dated as of the date hereof by and between HoT and the Company, as amended, restated or otherwise modified from time to time. "Media Efficiency Ratio" shall mean, as of any date of determination and with respect to any product of the Company, the quotient of (a) the Net Revenues of such product during the immediately preceding month of the date of determination, divided by (b) the Media Expenditures incurred in respect of such product during the immediately preceding month of the date of determination. "Media Expenditures" shall mean with respect to any product of the Company, the television media costs and expenses of the Company and its subsidiaries incurred in connection with such product, in each case as determined on a Consolidated basis in accordance with GAAP applied on an accrual basis and otherwise consistent with the past practice of the Company. "Nasdaq" means the NASDAQ National Market. "Net Appraised Value" means, with respect to any Exchanging Stockholder, the difference of (a) the Appraised Value (as calculated within 30 days of the date of the applicable Exit Exchange Closing) of all Securities of such Exchanging Stockholder that are subject to the Exit Notice, and (b) the amount that such Exchanging Stockholder owes to the Company or HoT as of the Exit Exchange Closing. "Net Income (Loss)" means, for any period, the net income (or loss), after deducting all operating expenses, provisions for taxes and reserves (including reserves for deferred income tax) and all other proper deductions, of the Company for such period (taken as a single accounting period) determined on a Consolidated basis in conformity with GAAP, including any income or loss of any Person accrued prior to the date such Person becomes a subsidiary of the Company or is merged into or consolidated with the Company or all or substantially all of such Person's assets are acquired by the Company. "Net Revenues" means, for any period of determination, the gross sale amounts from third party customers for sales by the Company and its subsidiaries of their products, less slotting, buy backs, free goods, returns and discounts for such period, in each case as determined on a Consolidated basis in accordance with GAAP applied on an accrual basis and otherwise consistent with the past practice of the Company. "New Securities" means any capital stock of the Company whether now or hereafter authorized, and all rights, options or warrants to purchase capital stock of the Company, and securities or indebtedness of any type whatsoever that are, or may become, convertible into or exchangeable for capital stock of the Company and any units consisting of securities or indebtedness and capital stock of the Company or rights, options or warrants therefor. "Offered Securities" shall have the meaning provided in Section 2.1. "Parent" shall mean Helen of Troy Limited, a Bermuda company. "Parent Common Stock" means the common shares, par value $.10 per share, of Helen of Troy Limited, a Bermuda company. "Partial Buyout Purchaser" shall have the meaning provided in Section 5.5. 5 "Partial Founding Group Buyout Purchaser" shall have the meaning provided in Section 5.3. "Partial Founding Group Purchaser" shall have the meaning provided in Section 2.2. "Partial Purchaser" shall have the meaning provided in Section 2.4. "Permitted Disposition" means: (a) A Disposition of the community property or common law interest of a Stockholder's spouse in all or any part of the Securities to such Stockholder upon the death of such spouse; (b) A Disposition of the community property or common law interest of a Stockholder's spouse in all or any part of the Securities to such Stockholder in connection with the divorce or termination of the marital relationship of the Stockholder and the Stockholder's spouse; (c) A Disposition resulting from a Stockholder's bona fide pledge of all or a portion of his Securities as security for indebtedness of such Stockholder incurred contemporaneously with the making of such pledge, provided that the pledgee shall, prior to the Disposition of Securities, execute and deliver a written agreement which is approved by the Company, to the effect that prior to foreclosing or otherwise realizing upon the Securities so pledged as a result of a default in the payment or other terms of the obligation secured by such pledged Securities, the pledgee will offer to sell such Securities to the Company and the Stockholders (other than the pledging Stockholder) as if the pledgee were a Stockholder proposing to make a Disposition of the Securities in the manner stated in Article 2 herein and the pledging Stockholder shall be bound by and shall join in the conveyance of the pledged Securities so purchased by the Company and/or the other Stockholders; (d) A Disposition by HoT or its Affiliates as a result of the foreclosure or realization upon the Securities pledged by any member of the Founding Group to HoT or its Affiliates pursuant to the Founding Group Pledge Agreements as security for indebtedness owing by such member of the Founding Group to HoT or its Affiliates; (e) A Disposition of Securities by HoT to one or more Affiliates of HoT or to any executive officer of HoT or its Affiliates, provided that each transferee shall, prior to the Disposition of Securities to such transferee, execute and deliver a written agreement which is approved by the Company to the effect that any Securities so disposed of shall continue to be subject to all of the provisions of this Agreement; (f) A Disposition by any member of the Founding Group to any other member of the Founding Group; and (g) A Disposition made pursuant to the terms of this Agreement. "Person" means any natural person, corporation, unincorporated organization, trust, joint-stock company, joint venture, association, company, limited or general partnership, any government, or any agency or political subdivision of any government. 6 "Preemptive Share" means, in any particular instance, the proportion which the number of shares of Common Stock owned by a Stockholder bears to the total number of shares of Common Stock outstanding, assuming for this purpose that all Common Stock Equivalents owned by such Stockholder and all other outstanding Common Stock Equivalents have been fully exercised, exchanged or converted. "Print Media Expenditures" means all newspaper, magazine, catalog and other print medium advertising costs and expenses of the Company and its subsidiaries, in each case as determined on a consolidated basis in accordance with GAAP applied on an accrual basis and otherwise consistent with the past practice of the Company. "Pro Rata Part" means, in any particular instance, the proportion which the number of shares of Common Stock owned by a Stockholder (assuming for this purpose that all Common Stock Equivalents owned by such Stockholder have been fully exercised, exchanged, or converted) bears to the aggregate number of shares of Common Stock owned by (a) for purposes of Section 2.2, 2.4 and Section 5.3, all Stockholders (assuming for this purpose that all Common Stock Equivalents owned by all of the Stockholders have been fully exercised, exchanged or converted) then holding an option to purchase Securities under Section 2.2, 2.4 or Section 5.3 and (b) for purposes of Article 3, all Stockholders (assuming for this purpose that all Common Stock Equivalents owned by all of the Stockholders have been fully exercised, exchanged or converted). "Purchase Agreement" means that certain Purchase Agreement dated as of March 14, 2000, among HoT and the Founding Group. "Put" shall have the meaning provided in Section 4.2. "Put/Call Closing" shall have the meaning provided in Section 4.3. "Put Notice" shall have the meaning provided in Section 4.2. "Registration Statement" shall have the meaning provided in Section 9.4. "Remaining Holder " shall have the meaning provided in Section 6.1. "SEC" means the Securities and Exchange Commission. "Securities" means the Common Stock, Common Stock Equivalents and any other securities of the Company of any class or character whatsoever, whether now or hereafter authorized and outstanding. "Securities Act" means the Securities Act of 1933, together with any amendments thereto and rules and regulations thereunder and any similar federal statute, rules or regulations in force in the future. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Selling Stockholder" shall have the meaning provided in Section 2.1. "Stockholder" or "Stockholders" shall have the meaning provided in the introductory paragraph of this Agreement. 7 "Subject Stockholder" means a Selling Stockholder, an Affected Stockholder, or other Stockholder whose Securities are subject to a Call, Put or an Exchange in accordance with this Agreement. "Substitute Director" shall have the meaning provided in Section 11.2. "Total Shares" shall have the meaning provided in Article 3. "Third Party" shall have the meaning provided in Section 6.1. "Triggering Event" shall have the meaning provided in Section 11.1. "Withdrawing Director" shall have the meaning provided in Section 11.2. 2. RESTRICTIONS ON CERTAIN DISPOSITIONS. 2.1. Right of First Refusal. A Stockholder shall not make or suffer any Disposition (other than a Permitted Disposition) of all or any part of his Securities, whether now owned or hereafter acquired, except in accordance with the terms of this Agreement, and any purported Disposition not made in compliance with this Agreement shall be void and of no force and effect. Each time a Stockholder proposes to make or suffers any Disposition of all or any portion of his Securities (other than a Permitted Disposition) pursuant to an unconditional bona fide third party offer, a gift by such Stockholder, or otherwise, such Stockholder, or in the event of his death or incapacity, any other appropriate Person (the "Selling Stockholder"), shall promptly so inform the Company and all other Stockholders by notice in writing (the "Disposition Notice") stating the number or amount of Securities that are the subject of such proposed Disposition (the "Offered Securities"), the name and address of the proposed transferee and the other terms and conditions of such proposed Disposition, including any consideration proposed to be received for the Offered Securities (and, if the proposed Disposition is to be wholly or partly for consideration other than cash or an indebtedness of any Person, the Disposition Notice shall state the amount of the cash consideration, if any, and shall describe all non-monetary consideration). By giving the Disposition Notice, the Selling Stockholder shall be deemed to have granted to the Company and the Stockholders (other than the Selling Stockholder) an option to purchase the Offered Securities (a) if such Disposition is pursuant to a bona-fide third party offer, at the same consideration and on the same payment terms as are set forth in the Disposition Notice (except that any portion of the consideration set forth in the Disposition Notice which is not cash or indebtedness of the transferee shall be payable in cash at the Appraised Value thereof as of the date of the Disposition Notice) and (b) if such Disposition is other than pursuant to a bona-fide third party offer, at a price equal to the Appraised Value of the Offered Securities. The Company shall notify the Stockholders promptly upon its receipt of any final determination of Appraised Value. Notwithstanding the foregoing, compliance with this Article shall not be required in the case of a Call or Put, which are governed by Article 4, a Buyout Event, a Control Transfer, an Exit Transaction, a Buy Back Event, or an Exchange, which are governed by Articles 5, 6, 7, 8 and 9, respectively. 2.2. Intention to Exercise by Members of the Founding Group. If the Offered Securities are Securities held by a member of the Founding Group, each remaining member of the Founding Group (other than the Selling Stockholder) shall have until the 30th day following such Stockholder's receipt of any Disposition Notice or the final determination of Appraised Value related to Offered Securities or any non-monetary consideration referenced in the Disposition Notice, whichever is later, to notify the Company and the other Stockholders of the number or amount of such Offered Securities that such Stockholder desires to purchase. The failure of any member of the Founding Group to submit any notice within the applicable period shall constitute an election on the part of such member of the Founding Group not to purchase any of the Offered Securities to which the requisite notice pertained. In the event all of the members of the Founding Group (other than the Selling 8 Stockholder) elect to purchase all or more than all of their respective Pro Rata Parts of the Offered Securities, then each member of the Founding Group (other than the Selling Stockholder) shall be obligated to purchase such Stockholder's Pro Rata Part of the Offered Securities. In the event any member of the Founding Group (other than the Selling Stockholder) elects to purchase none or less than all of such Stockholder's Pro Rata Part of the Offered Securities, then (x) each Stockholder who elected to purchase less than all of such Stockholder's Pro Rata Part of the Offered Securities ("Partial Founding Group Purchaser") shall be obligated to purchase the number or amount of Offered Securities indicated in such Partial Founding Group Purchaser's notice pursuant to this Section and (y) each Stockholder who elected to purchase all or more than all of such Stockholder's Pro Rata Part of the Offered Securities ("Full Founding Group Purchaser") shall be obligated to purchase the lesser of (i) the number or amount of Offered Securities indicated in such Full Founding Group Purchaser's notice pursuant to this Section or (ii) such Full Founding Group Purchaser's Pro Rata Part of the Offered Securities plus a number or amount of Offered Securities equal to the product of (A) the difference between the number or amount of Offered Securities constituting the Partial Founding Group Purchasers' aggregate Pro Rata Parts of the Offered Securities minus the aggregate number or amount of Offered Securities that Partial Founding Group Purchasers elected to purchase, multiplied by (B) a fraction the numerator of which shall be the number or amount of Offered Securities that such Full Founding Group Purchaser elected to purchase in excess of his Pro Rata Part of the Offered Securities and the denominator of which shall be the aggregate number or amount of Offered Securities that all Full Founding Group Purchasers elected to purchase in excess of the Full Founding Group Purchasers' aggregate Pro Rata Parts of the Offered Securities. 2.3. Intention to Exercise by Company. If the Offered Securities are not Securities held by a member of the Founding Group, within 30 days of Company's receipt of any Disposition Notice or the final determination of Appraised Value related to the Offered Securities or any non-monetary consideration referenced in the Disposition Notice, whichever is later, the Company shall notify the Stockholders of the number or amount of Offered Securities that it desires to purchase. If the Offered Securities are Securities held by a member of the Founding Group, the Company shall have until the 30th day following either (a) its receipt of all notices to be provided by members of the Founding Group pursuant to Section 2.2, or (b) the failure of any member of the Founding Group to provide such notice within the applicable time period, as applicable, to notify the Stockholders of the number or amount of remaining Offered Securities that it desires to purchase. The failure of the Company to submit any such notice within the applicable period shall constitute an election on its part not to purchase any of the Offered Securities to which the requisite notice pertained. 2.4. Intention to Exercise by Other Stockholders. If the Company fails to exercise its option to purchase all of the remaining Offered Securities, each Stockholder (other than the Selling Stockholder and Stockholders who had an option to purchase the Offered Securities pursuant to Section 2.2) shall have until the 30th day following either (a) such Stockholder's receipt of the notice to be provided by the Company pursuant to Section 2.3 or (b) the Company's failure to provide such notice within the applicable time period, as applicable, to notify the Company of the number or amount of remaining Offered Securities that such Stockholder desires to purchase. The failure of any Stockholder to submit any notice within the applicable period shall constitute an election on the part of such Stockholder not to purchase any of the Offered Securities to which the requisite notice pertained. In the event all of the Stockholders (other than the Selling Stockholder and Stockholders who had an option to purchase the Offered Securities pursuant to Section 2.2) elect to purchase all or more than all of their respective Pro Rata Parts of the remaining Offered Securities, then each Stockholder (other than the Selling Stockholder and Stockholders who had an option to purchase the Offered Securities pursuant to Section 2.2) shall be obligated to purchase such Stockholder's Pro Rata Part of the remaining Offered Securities. In the event any Stockholder (other than the Selling Stockholder and Stockholders who had an option to purchase the Offered Securities pursuant to Section 2.2) elects to purchase none or less than all of such Stockholder's Pro Rata Part of the remaining Offered Securities, then (x) each Stockholder who elected to purchase less than all of such 9 Stockholder's Pro Rata Part of the remaining Offered Securities ("Partial Purchaser") shall be obligated to purchase the number or amount of Offered Securities indicated in such Partial Purchaser's notice pursuant to this Section and (y) each Stockholder who elected to purchase all or more than all of such Stockholder's Pro Rata Part of the remaining Offered Securities ("Full Purchaser") shall be obligated to purchase the lesser of (i) the number or amount of Offered Securities indicated in such Full Purchaser's notice pursuant to this Section or (ii) such Full Purchaser's Pro Rata Part of the remaining Offered Securities plus a number or amount of Offered Securities equal to the product of (A) the difference between the number or amount of Offered Securities constituting the Partial Purchasers' aggregate Pro Rata Parts of the remaining Offered Securities minus the aggregate number or amount of Offered Securities that Partial Purchasers elected to purchase, multiplied by (B) a fraction the numerator of which shall be the number or amount of Offered Securities that such Full Purchaser elected to purchase in excess of his Pro Rata Part of the remaining Offered Securities and the denominator of which shall be the aggregate number or amount of Offered Securities that all Full Purchasers elected to purchase in excess of the Full Purchasers' aggregate Pro Rata Parts of the remaining Offered Securities. In the event that the Stockholders (other than the Selling Stockholder and Stockholders who had an option to purchase the Offered Securities pursuant to Section 2.2) do not elect to purchase the remaining Offered Securities, then the Company may, at its election, purchase all such remaining Offered Securities. 2.5. Manner of Exercise. Upon determination of the number of Offered Securities to be purchased by the Company and the Stockholders (other than the Selling Stockholder), the Company, on its behalf and, if applicable, on behalf of the Stockholders who are purchasing Offered Securities, shall give notice of exercise or nonexercise to the Selling Stockholder and all other Stockholders within 15 days following the expiration of the last option capable of being exercised pursuant to Sections 2.2, 2.3 or 2.4. 2.6. Requirement to Purchase All Offered Securities. Notwithstanding any other provision of this Agreement, in no event shall any Selling Stockholder be required to sell any of the Offered Securities to the Company and/or the other Stockholders unless, within the period provided, the Selling Stockholder has been notified that all the Offered Securities will be purchased by the Company or the other Stockholders or both. If either or both the Company and the other Stockholders do not elect to purchase all the Offered Securities, then neither the Company nor the other Stockholders shall have any right or obligation to purchase any of the Offered Securities. 2.7. Closing. The closing of the purchase and sale of Securities that are being purchased and sold under this Article (the "Closing") shall take place at the Company's principal executive offices on the 10th day following the date of delivery of the notice of acceptance by the Company and the Stockholders pursuant to Section 2.5 (or if such date is a Saturday, Sunday or legal holiday in the state where such offices are located, the first day thereafter that is not a Saturday, Sunday or legal holiday) at 10:00 a.m., local time; provided, however, that if a Person whose Securities are being sold is deceased or mentally incompetent, the Closing shall be delayed as long as is necessary to allow the legal representative, executor or administrator of the Person whose Securities are to be sold to qualify properly as such in order that such legal representative, executor or administrator shall have all necessary authority to convey such Securities. At the Closing, the parties shall take all action necessary to convey such Securities to be transferred in accordance with this Agreement, free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), all as reasonably determined by the Company. 2.8. Failure to Exercise. If the Company and/or the Stockholders (other than the Selling Stockholder) do not elect to purchase all of the Offered Securities within the period provided, then, subject to Article 3, all of such Offered Securities may be disposed of by the Selling Stockholder to the prospective transferee named in the 10 Disposition Notice, for the price and on the terms and conditions set forth in the Disposition Notice, at any time within 90 days after the expiration of the period provided for in the notice of the Company to be delivered pursuant to Section 2.5, provided that each transferee shall, prior to the Disposition of the Offered Securities to such transferee, execute and deliver to the Company a valid and binding agreement, satisfactory to the Company, to become a Stockholder under this Agreement. Each party hereto who becomes a Selling Stockholder agrees to grant to the Company full access to all records of the Selling Stockholder to determine to its satisfaction the terms of any Disposition pursuant to this Section to any transferee named in the Disposition Notice. Any Securities not so disposed of within such 90 day period shall remain subject to all of the provisions of this Agreement. 3. TAG-A-LONG RIGHTS. If the Company and the Stockholders other than the Selling Stockholder do not elect to purchase the Offered Securities in accordance with Article 2, then in each case involving the sale (other than in Permitted Dispositions) by one or more Stockholders of Common Stock or Common Stock Equivalents representing (in the aggregate) in excess of 5% of the total outstanding Common Stock (assuming for such purpose that all Common Stock Equivalents have been fully exercised, exchanged or converted) in a single transaction or series of related transactions, each Stockholder shall have the right to participate in the Disposition set forth in each applicable Disposition Notice (other than a Disposition described in Section 2.1(b) herein) in a manner such that each Stockholder (including the Selling Stockholder) will be entitled to sell up to his Pro Rata Part of the total number of shares of Common Stock (assuming for this purpose that all Common Stock Equivalents are exercised, exchanged, or converted) to be transferred in the proposed Disposition, as stated in the Disposition Notice (the "Total Shares"). Each Stockholder (other than the Selling Stockholder) shall have until the 10th day following such Stockholder's receipt of the notice to be provided by the Company pursuant to Section 2.4 herein to notify the Selling Stockholder of his election to participate in such Disposition pursuant to this Article. The failure of any Stockholder to submit such notice within the applicable period shall constitute an election on the part of such Stockholder not to participate in such Disposition. The Selling Stockholder's portion of the Total Shares shall be reduced to the extent necessary to permit the other Stockholders to exercise their rights under this Article 3. If any Stockholder elects to sell less than his Pro Rata Part of the Total Shares, the Selling Stockholder shall be entitled to take up the deficiency. The Disposition shall not be consummated by the Selling Stockholder unless, simultaneously therewith, each other Stockholder who has notified the Selling Stockholder of such other Stockholder's election to participate in such Disposition is permitted to sell his Pro Rata Part of the Total Shares (or such lesser amount of the Total Shares as such other Stockholder may desire) to the transferee stated in the Disposition Notice for the consideration and on the terms set forth in the Disposition Notice. 4. PUT AND CALL AGREEMENTS. 4.1. Call. Each member of the Founding Group hereby grants to HoT the right and option, exercisable by giving notice upon the terms and conditions and in the manner hereinafter provided, to purchase from the members of the Founding Group and/or their transferees all (but not less than all) of the Securities held by all such Persons, upon the following terms and conditions (the "Call"): (a) At any time on or after the second anniversary of the date hereof through and including the later of (i) the fifth anniversary of the date hereof or (ii) if the Call is prohibited from being exercised by reason of the provisions of Sections 6.1 or 7.1, then 30 days after the expiration of the applicable period provided in Sections 6.2(b) or 7.1, as the case may be, HoT may purchase from the members of the Founding Group and/or their transferees the Securities held by all such Persons for an amount in cash equal to the Appraised Value of such Securities. 11 (b) HoT may exercise the Call by delivering to the Company and the members of the Founding Group and/or their transferees written notice of exercise thereof, which shall set forth HoT's and/or its transferees' estimate of the Appraised Value of such Securities (the "Call Notice"). (c) Notwithstanding anything herein to the contrary, if in calculating the Appraised Value of the Securities subject to the Call it is determined that the final Appraised Value of such Securities is 5% or more than the Appraised Value set forth in the Call Notice, HoT may, at its option, rescind its election to exercise the Call within five days after the determination of such final Appraised Value. 4.2. Put. HoT hereby grants to the members of the Founding Group and/or their transferees the right and option, exercisable by giving notice upon the terms and conditions and in the manner hereinafter provided, to require HoT to purchase from the members of the Founding Group and/or their transferees all (but not less than all) of the Securities held by all such Persons (the "Put"), upon the following terms and conditions: (a) At any time on or after the second anniversary of the date hereof through and including the later of (i) the fifth anniversary of the date hereof or (ii) if the Put is prohibited from being exercised by reason of the provisions of Sections 6.1 or 7.1, then 30 days after the expiration of the applicable period provided in Sections 6.2(b) or 7.1, as the case may be, the members of the Founding Group and/or their transferees may require HoT to purchase the Securities held by all such Persons for an amount in cash equal to the Appraised Value of such Securities. (b) The members of the Founding Group and/or their transferees may exercise the Put by delivering to the Company and HoT and/or its transferees written notice of exercise thereof, which shall set forth such members' and/or their transferees' estimate of the Appraised Value of such Securities (the "Put Notice"). (c) Notwithstanding anything herein to the contrary, if in calculating the Appraised Value of the Securities subject to the Put it is determined that the final Appraised Value of such Securities is less than the Appraised Value set forth in the Put Notice by 5% or more, the members of the Founding Group and/or their transferees may, at their option, rescind their election to exercise the Put within five days after the determination of such final Appraised Value. 4.3. Closing. The closing of the purchase and sale of the Call or Put (the "Put/Call Closing") shall take place at the Company's principal executive offices on the 180th day following the Call Notice or Put Notice, as the case may be (or if such applicable date is a Saturday, Sunday or legal holiday in the state where such offices are located, the first day thereafter that is not a Saturday, Sunday or legal holiday) at 10:00 a.m., local time. At the Put/Call Closing, the parties shall take all necessary action to convey such Securities to be transferred in accordance with this Article, free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), all as reasonably determined by the Company. Each Stockholder agrees that if and when such Stockholder becomes entitled to any amounts pursuant to this Article, any amounts that such Stockholder owes to the Company or HoT shall be deducted from the amounts otherwise payable to such Stockholder at the Put/Call Closing and paid directly to the Company or HoT, as applicable. 5. BUYOUT OPTION. 5.1. Death; Bankruptcy of a Stockholder. If a Stockholder shall die or become a Bankrupt Stockholder, the Affected Stockholder (or his representative) shall promptly give notice thereof to the Company 12 and the other Stockholders. The Company and the other Stockholders shall have the option to acquire the Securities of the Affected Stockholder in accordance with Sections 5.3, 5.4 and 5.5, at a price equal to the Appraised Value of such Securities. The Company shall notify the Stockholders promptly upon its receipt of any final determination of Appraised Value. 5.2. Death of a Spouse of Stockholder; Divorce. If a divorce or other termination of marital relationship of a Stockholder shall occur or if a spouse of a Stockholder dies, the Affected Stockholder (or his representative) shall promptly give notice thereof to the Company and the other Stockholders. The Affected Stockholder shall have the option to acquire the Securities of the Affected Stockholder's spouse or former spouse (or his or her representative), by notifying such spouse or former spouse (or his or her representative) of such exercise within 90 days following the occurrence of the Buyout Event. If the Affected Stockholder does not exercise his right, then the Company and the other Stockholders shall have the option to acquire the Securities of the Affected Stockholder's spouse or former spouse (or his or her representative) in accordance with Sections 5.3, 5.4 and 5.5, at a price equal to the Appraised Value of such Securities. The Company shall notify the Stockholders promptly upon its receipt of any final determination of Appraised Value. 5.3. Intention to Exercise by Members of the Founding Group. If the Affected Stockholder is a member of the Founding Group and either (a) such Affected Stockholder fails to acquire the Securities of the Affected Stockholder's spouse or former spouse (or his or her representative) in accordance with Section 5.2, or (b) the Affected Stockholder dies or is a Bankrupt Stockholder, then each remaining member of the Founding Group whose Securities are not subject to a Buyout Event shall have until the 60th day following such Stockholder's receipt of the notice required pursuant to Section 5.1 or 5.2 to notify the Company and the other Stockholders of the number or amount of the Securities of such Affected Stockholder or Affected Stockholder's spouse or former spouse (or his or her representative), as the case may be, that such Stockholder desires to purchase. The failure of any member of the Founding Group to submit any notice within the applicable period shall constitute an election on the part of such member of the Founding Group not to purchase any of such Securities to which the requisite notice pertained. In the event all of the such remaining members of the Founding Group elect to purchase all or more than all of their respective Pro Rata Parts of such Securities, then each such member of the Founding Group shall be obligated to purchase such Stockholder's Pro Rata Part of such Securities. In the event any such member of the Founding Group elects to purchase none or less than all of such Stockholder's Pro Rata Part of such Securities, then (x) each Stockholder who elected to purchase less than all of such Stockholder's Pro Rata Part of such Securities ("Partial Founding Group Buyout Purchaser") shall be obligated to purchase the number or amount of such Securities indicated in such Partial Founding Group Buyout Purchaser's notice pursuant to this Section and (y) each Stockholder who elected to purchase all or more than all of such Stockholder's Pro Rata Part of such Securities ("Full Founding Group Buyout Purchaser") shall be obligated to purchase the lesser of (i) the number or amount of such Securities indicated in such Full Founding Group Buyout Purchaser's notice pursuant to this Section or (ii) such Full Founding Group Buyout Purchaser's Pro Rata Part of such Securities plus a number or amount of such Securities equal to the product of (A) the difference between the number or amount of such Securities constituting the Partial Founding Group Buyout Purchasers' aggregate Pro Rata Parts of the such Securities minus the aggregate number or amount of such Securities that Partial Founding Group Buyout Purchasers elected to purchase, multiplied by (B) a fraction the numerator of which shall be the number or amount of such Securities that such Full Founding Group Buyout Purchaser elected to purchase in excess of his Pro Rata Part of such Securities and the denominator of which shall be the aggregate number or amount of such Securities that all Full Founding Group Buyout Purchasers elected to purchase in excess of the Full Founding Group Buyout Purchasers' aggregate Pro Rata Parts of such Securities. 5.4. Intention to Exercise by Company. If the Affected Stockholder is not a member of the Founding Group, then within 180 days of Company's receipt of the notice required pursuant to Section 5.1 or 5.2, the 13 Company shall notify the Stockholders of the number or amount of the Securities of the Affected Stockholder or the Affected Stockholder's spouse or former spouse (or his or her representative), as the case may be, that it desires to purchase. If the Affected Stockholder is a member of the Founding Group, the Company shall have until the 120th day following either (a) its receipt of all notices to be provided by members of the Founding Group pursuant to Section 5.3, or (b) the failure of any member of the Founding Group to provide such notice within the applicable time period, as applicable, to notify the Stockholders of the number or amount of remaining Securities of the Affected Stockholder or the Affected Stockholder's spouse or former spouse (or his or her representative), as the case may be, that it desires to purchase. The failure of the Company to submit any such notice within the applicable period shall constitute an election on its part not to purchase any of the Securities to which the requisite notice pertained. 5.5. Intention to Exercise by Other Stockholders. If the Company fails to exercise its option to purchase all of such remaining Securities, each Stockholder (other than Stockholders whose Securities are subject to a Buyout Event or who had an option to purchase Securities pursuant to Section 5.3) shall have until the 30th day following either (a) such Stockholder's receipt of the notice to be provided by the Company pursuant to Section 5.4 or (b) the Company's failure to provide such notice within the applicable time period, as applicable, to notify the Company of the number or amount of such remaining Securities of the Affected Stockholder or the Affected Stockholder's spouse or former spouse (or his or her representative), as the case may be, that such Stockholder desires to purchase. The failure of any Stockholder to submit any notice within the applicable period shall constitute an election on the part of such Stockholder not to purchase any of such Securities to which the requisite notice pertained. In the event all of such Stockholders elect to purchase all or more than all of their respective Pro Rata Parts of such remaining Securities, then each such Stockholder shall be obligated to purchase such Stockholder's Pro Rata Part of the such remaining Securities. In the event any such Stockholder elects to purchase none or less than all of such Stockholder's Pro Rata Part of such remaining Securities, then (x) each Stockholder who elected to purchase less than all of such Stockholder's Pro Rata Part of such remaining Securities ("Partial Buyout Purchaser") shall be obligated to purchase the number or amount of such Securities indicated in such Partial Buyout Purchaser's notice pursuant to this Section and (y) each Stockholder who elected to purchase all or more than all of such Stockholder's Pro Rata Part of such remaining Securities ("Full Buyout Purchaser") shall be obligated to purchase the lesser of (i) the number or amount of such Securities indicated in such Full Buyout Purchaser's notice pursuant to this Section or (ii) such Full Buyout Purchaser's Pro Rata Part of such remaining Securities plus a number or amount of such Securities equal to the product of (A) the difference between the number or amount of such Securities constituting the Partial Buyout Purchasers' aggregate Pro Rata Parts of such remaining Securities minus the aggregate number or amount of such Securities that Partial Buyout Purchasers elected to purchase, multiplied by (B) a fraction the numerator of which shall be the number or amount of such Securities that such Full Buyout Purchaser elected to purchase in excess of his Pro Rata Part of such remaining Securities and the denominator of which shall be the aggregate number or amount of such Securities that all Full Buyout Purchasers elected to purchase in excess of the Full Buyout Purchasers' aggregate Pro Rata Parts of such remaining Securities. In the event that such Stockholders do not elect to purchase such remaining Securities, then the Company may, at its election, purchase all such remaining Securities. 5.6. Manner of Exercise. Upon determination of the number of Securities to be purchased by the Company and the other Stockholders, the Company, on its behalf and, if applicable, on behalf of the Stockholders who are purchasing Securities, shall give notice of exercise or nonexercise to the Affected Stockholder (or his or her representative) and all other Stockholders within 15 days following the expiration of the last option capable of being exercised pursuant to Sections 5.3, 5.4 or 5.5. 5.7. Closing. The closing of the purchase and sale of Securities that are being purchased and sold under this Article (the "Buyout Closing") shall take place at the Company's principal executive offices on the 10th 14 day following the date of delivery of the notice of acceptance by the Company pursuant to Section 5.6 (or if such date is a Saturday, Sunday or legal holiday in the state where such offices are located, the first day thereafter that is not a Saturday, Sunday or legal holiday) at 10:00 a.m., local time; provided, however, that if a Person whose Securities are being sold is deceased or mentally incompetent, the Buyout Closing shall be delayed as long as is necessary to allow the legal representative, executor or administrator of the Person whose Securities are to be sold to qualify properly as such in order that such legal representative, executor or administrator shall have all necessary authority to convey such Securities. At the Buyout Closing, the parties shall take all action necessary to convey such Securities to be transferred in accordance with this Agreement, free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), all as reasonably determined by the Company. Each Stockholder agrees that if and when an Affected Stockholder (or his legal representative, executor or administrator) becomes entitled to any amounts pursuant to this Article, any amounts that such Affected Stockholder owes to the Company shall be deducted from the amounts otherwise payable to such Stockholder at the Buyout Closing and paid directly to the Company. 5.8. Failure to Exercise. If the Company and/or the other Stockholders do not elect to purchase all of the Securities of the Affected Stockholder or the Affected Stockholder's spouse or former spouse (or his or her representative) within the applicable period provided in this Article, then any Disposition of (a) the community property or common law interest of such Affected Stockholder or Affected Stockholder's spouse in such Securities upon the death of such Affected Stockholder or Affected Stockholder's spouse or (b) such Securities in connection with the divorce or termination of the marital relationship of such Affected Stockholder and Affected Stockholder's spouse to such Affected Stockholder, Affected Stockholder's spouse or the heirs or devisees of such Affected Stockholder or Affected Stockholder's spouse, shall be permitted under this Agreement; provided that each transferee shall, prior to the Disposition of such Securities to such transferee, execute and deliver to the Company a valid and binding agreement, satisfactory to the Company, to become a Stockholder under this Agreement. 6. COME-A-LONG RIGHTS. 6.1. Come-A-Long Rights. At any time on or after the first anniversary of the date hereof, if any Stockholder or group of Stockholders controlling more than 50% of the Common Stock on a fully diluted basis acting separately as a class shall propose to make a transfer (a "Control Transfer") on an arm's-length basis to an unrelated third party desiring to acquire 100% of the Securities (on a fully diluted basis) of the Company (the "Compelled Sale Transfer Offer") for an amount equal to or greater than US$30,000,000.00, then such Stockholder or Stockholders shall have the right, exercisable as set forth below, to require all of the remaining Stockholders and their transferees that are bound by this Agreement (the "Remaining Holders") to sell all shares of any class of Securities (other than Securities that are not Common Stock or Common Stock Equivalents which the board of directors of the Company elects to exclude from the provisions of this Article) to the third party to whom the transfer is proposed to be made (the "Third Party"). If the Stockholder or Stockholders initiating the sale, exercise the right in connection with a Control Transfer as provided by this Article, (a) neither the Company nor any Stockholder shall have a right of first refusal pursuant to Article 2 in connection with such transfer and (b) none of HoT, the members of the Founding Group or their respective transferees shall have the right to exercise the Put or Call provided in Article 4 or an Exchange provided in Article 9 until the expiration of the applicable time period specified in Section 6.2(b). The consideration to be received by the Remaining Holders for each share of any class of Securities sold pursuant to this Article shall be the same consideration per share of such class to be received by the Stockholder or Stockholders initiating the sale (or, if the Stockholder initiating the sale shall not own any such Securities of the class owned by the Remaining Holders, an amount calculated based upon the number of shares of Common Stock receivable upon conversion or exchange of such Securities 15 of such class), and the terms and conditions of such sale by the Remaining Holders shall be the same as those upon which the Stockholder or Stockholders initiating the sale sell their Securities. 6.2. Notice. (a) The Stockholder or Stockholders shall cause the Compelled Sale Transfer Offer to be reduced to writing and shall provide a written notice (the "Compelled Sale Transfer Notice") of such Compelled Sale Transfer Offer to each of the Remaining Holders. The Compelled Sale Transfer Notice shall contain written notice of the exercise of the Stockholder's or Stockholders' rights pursuant to Section 6.1, setting forth the consideration per share to be paid by the Third Party and the other terms and conditions of the Compelled Sale Transfer Offer. Within 20 days following the date of the Compelled Sale Transfer Notice, each of the Remaining Holders shall deliver to the Stockholder or Stockholders designated in the Compelled Sale Transfer Notice certificates representing the Securities (except as contemplated above in this Article) held by such Remaining Holder, duly endorsed (and in the case of options or warrants, after exercise thereof), together with all other documents required to be executed in connection with such Compelled Sale Transfer Offer or, if such delivery is not permitted by applicable law, an unconditional agreement to deliver such certificates pursuant to this Article at the closing for such Compelled Sale Transfer Offer against delivery to such Remaining Holder of the consideration therefor, to the extent permitted by applicable law. In the event that a Remaining Holder should fail to deliver such certificates as aforesaid, the Company shall cause the books and records of the Company to show that such Securities are bound by the provisions of this Article and that such Securities shall be transferred only to the Third Party upon surrender for transfer by the Remaining Holder thereof. (b) If within 150 days (or such longer period not exceeding 210 days as may be necessary to comply with any applicable provisions of any insurance regulatory authority, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended or other applicable regulatory requirements) after the Stockholder or Stockholders give the Compelled Sale Transfer Notice, they have not completed the sale of all the Securities to be transferred, the Stockholder or Stockholders shall return to each of the Remaining Holders all certificates representing Securities that such Remaining Holder delivered for sale pursuant hereto, and all the restrictions on sale or other disposition contained in this Agreement with respect to Securities owned by the Stockholder or Stockholders and Remaining Holders shall again be in effect. (c) Promptly after the consummation of the sale of Securities of the Stockholder or Stockholders and Remaining Holders pursuant to this Article, the Stockholder or Stockholders shall give notice thereof to the Remaining Holders, shall remit to each of the Remaining Holders the net proceeds of the sale of the Securities of such Remaining Holders sold pursuant thereto, and shall furnish such other evidence of the completion and time of completion of such sale or other disposition and the terms thereof as may be reasonably requested by such Remaining Holders. 6.3. Costs. Each Stockholder will bear such Stockholder's pro-rata share (based on such Stockholder's share of the aggregate proceeds paid in such Control Transfer) of the costs of any Control Transfer pursuant to a Control Transfer to the extent such costs are incurred for the benefit of all Stockholders and are not otherwise paid by the Company or the acquiring party. Costs incurred by Stockholders at their option and on their own behalf and income and other taxes incurred by a Stockholder as a result of the transactions hereunder will not be considered costs of the transaction hereunder and will be borne by the Stockholder or Stockholders incurring such costs or taxes. Except for the foregoing, no Stockholder shall be obligated to bear any material costs in connection with any Control Transfer. 16 7. EXIT TRANSACTIONS. 7.1. Exit Transaction. If at any time following the first anniversary of the date hereof, any Stockholder or group of Stockholders controlling more than 50% of the Common Stock on a fully diluted basis acting separately as a class shall propose to initiate an Exit Transaction with an unrelated third party desiring to consummate an Exit Transaction where the fair market value of the aggregate consideration paid or payable in connection therewith is equal to or greater than US$30,000,000.00, then such Stockholder shall have the right, exercisable as set forth below, to require all remaining Stockholders and their transferees bound by this Agreement to participate in such Exit Transaction. In connection with any such Exit Transaction, each Stockholder will consent to and raise no objections against such Exit Transaction and (a) if the Exit Transaction is structured as or includes (i) a merger, consolidation, reorganization or recapitalization of the Company, each Stockholder shall waive any dissenters rights, appraisal rights or similar rights in connection with such merger, consolidation, reorganization or recapitalization of the Company and shall vote in favor of such merger, consolidation, reorganization or recapitalization and shall take all actions reasonably necessary to consummate such merger, consolidation, reorganization or recapitalization, or (ii) a sale of assets, each Stockholder shall waive any dissenters rights, appraisal rights or similar rights in connection with such sale of assets and shall vote in favor of such sale and any subsequent liquidation of the Company or other distribution of the proceeds therefrom, and (b) each Stockholder shall take all reasonably necessary or desirable actions in connection with the consummation of the Exit Transaction as are reasonably requested by the Stockholder or Stockholders initiating such Exit Transaction. If the Stockholder or Stockholders initiating the Exit Transaction, exercise the right in connection with a Exit Transaction as provided by this Article, (i) neither the Company nor any Stockholder shall have a right of first refusal pursuant to Article 2 in connection with such Exit Transaction and (ii) none of HoT, the members of the Founding Group or their respective transferees shall have the right to exercise the Put or Call provided in Article 4 or an Exchange provided in Article 8 until the expiration of the 150 days (or such longer period not exceeding 210 days as may be necessary to comply with any applicable provisions of any insurance regulatory authority, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended or other applicable regulatory requirements) after the Stockholder or Stockholders give the Exit Transaction Notice. Following the expiration of such 150 day or 210 day period, as applicable, all the restrictions on sale or other disposition contained in this Agreement with respect to Securities owned by the Stockholder or Stockholders shall again be in effect. If the Exit Transaction is structured as or includes a merger, consolidation, reorganization or recapitalization of the Company, the consideration to be received by all Stockholders for each share of any class of Securities sold pursuant to this Article shall be the same consideration per share of such class to be received by the Stockholder or Stockholders initiating the Exit Transaction (or, if the Stockholder initiating the Exit Transaction shall not own any such Securities of the class owned by the other Stockholders, an amount calculated based upon the number of shares of Common Stock receivable upon conversion or exchange of such Securities of such class), and the terms and conditions of such Exit Transaction by the Stockholder or Stockholders initiating such Exit Transaction shall be the same as those upon the other Stockholders. 7.2. Notice. The Stockholder or Stockholders shall cause the Exit Transaction to be reduced to writing and shall provide a written notice (the "Exit Transaction Notice") of such Exit Transaction to each of the other Stockholders. The Exit Transaction Notice shall contain written notice of the exercise of the Stockholder's or Stockholders' rights pursuant to Section 7.1, setting forth the consideration to be paid for the Company's assets or Securities and the other terms and conditions of the Exit Transaction. 7.3. Purchaser Representative. If the Company or the Stockholders enter into any transaction for which Rule 506 (or any similar rule then in effect) promulgated by the SEC may be available with respect to such negotiation or transaction (including a merger, consolidation or other reorganization), the Stockholders who are not accredited investors (as such term is defined in Rule 501 promulgated by the SEC) will, at the request of the Company, appoint a purchaser representative (as such term is defined in Rule 501 promulgated by the SEC) reasonably acceptable to the Company. If any Stockholder appoints a purchaser representative designated by the Company, the Company will pay the fees of such purchaser representative, but if any Stockholder declines to 17 appoint the purchaser representative designated by the Company such Stockholder will appoint another purchaser representative, and such Stockholder will be responsible for the fees and expenses of the purchaser representative so appointed. 7.4. Costs. Each Stockholder will bear such Stockholder's pro-rata share (based on such Stockholder's share of the aggregate proceeds paid in such Exit Transaction) of the costs of any Exit Transaction pursuant to an Exit Transaction to the extent such costs are incurred for the benefit of all Stockholders and are not otherwise paid by the Company or the acquiring party. Costs incurred by Stockholders at their option and on their own behalf and income and other taxes incurred by a Stockholder as a result of the transactions hereunder will not be considered costs of the transaction hereunder and will be borne by the Stockholder or Stockholders incurring such costs or taxes. Except for the foregoing, no Stockholder shall be obligated to bear any material costs in connection with any Exit Transaction. 7.5. Waiver of Appraisal or Dissenters Rights. EACH STOCKHOLDER HEREBY WAIVES ANY APPRAISAL RIGHTS OR DISSENTER'S RIGHTS RELATED TO AN EXIT TRANSACTION TO WHICH SUCH STOCKHOLDER MAY OTHERWISE BE ENTITLED, WHETHER UNDER NEVADA REVISED STATUTES, NEVADA LAW OR OTHERWISE. 8. BUY BACK. 8.1. Buyback. (a) Any Stockholder who is or becomes an employee of the Company or HoT, or any of their respective Affiliates, agrees that, if such Stockholder shall voluntarily cease to be an employee of the Company or HoT, or any Affiliate (other than for "Good Reason") or such Stockholder's employment is terminated "for cause" (as each of those terms are defined in the respective employment agreements with such Stockholders) (each, a "Buy Back Event"), the Company shall have an option to purchase any Securities then owned by such former employee Stockholder free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), by notifying the terminated Stockholder of such exercise within 90 days following such Stockholder's termination. The failure of the Company to submit any such notice within the applicable period shall constitute an election on its part not to purchase any of such Securities to which the requisite notice pertained. (b) If Ovadia shall, without the prior written consent of the Company and HoT, directly or indirectly, own, manage, operate, join, control or participate in or be connected with, anywhere in the United States, as an officer, employee, agent, consultant, sales representative, partner, stockholder, or director of any business enterprise which is, directly or indirectly, in competition with any products sold or distributed by the Company or any of its subsidiaries (also a Buy Back Event), Ovadia shall promptly give notice thereof to the Company and HoT. HoT shall have the option to acquire all (but not less than all) of the Securities of Ovadia free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), by notifying Ovadia of such exercise within 90 days following HoT's receipt of Ovadia's notice pursuant to this subsection. If Ovadia shall incur a Buy Back Event without giving the notice required by this subsection, notice shall be deemed to have been given to the Company and HoT as of the date HoT first learns of such Buy Back Event. 8.2. Purchase Price. The purchase price for Securities being purchased pursuant to this Article shall be paid in cash and shall be an amount in cash equal to the Appraised Value of such Securities as of (a) the date of termination of such former employee Stockholder's employment or (b) as of the date HoT notifies Ovadia of its intention to acquire his Securities pursuant to Section 8.1(b), as applicable. 18 8.3. Closing. The closing of the purchase and sale of Securities that are being purchased and sold under this Article (the "Buy Back Closing") shall take place at the Company's principal executive offices on the 10th day following the date of delivery of the notice of acceptance by the Company pursuant to Section 8.1 (or if such date is a Saturday, Sunday or legal holiday in the state where such offices are located, the first day thereafter that is not a Saturday, Sunday or legal holiday) at 10:00 a.m., local time; provided, however, that if a Person whose Securities are being sold is deceased or mentally incompetent, the Buy Back Closing shall be delayed as long as is necessary to allow the legal representative, executor or administrator of the Person whose Securities are to be sold to qualify properly as such in order that such legal representative, executor or administrator shall have all necessary authority to convey such Securities. At the Buy Back Closing, the parties shall take all action necessary to convey such Securities to be transferred in accordance with this Agreement, free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), all as reasonably determined by the Company. Each Stockholder agrees that if and when such Stockholder becomes entitled to any amounts pursuant to this Article, any amounts that such Stockholder owes to the Company or HoT shall be deducted from the amounts otherwise payable to such Stockholder at the Buy Back Closing and paid directly to the Company or HoT, as applicable. 9. EXIT EXCHANGE RIGHTS. 9.1. Exchange. Subject to terms and conditions of Articles 6 and 7 and this Article, at any time after the expiration of the last to expire of the periods set forth in Sections 4.1(a) and 4.2(a) until the second anniversary of the date thereof, the members of the Founding Group (but not less than all, and, in the case of the death of a Founding Group member, his representative) (the "Exchanging Stockholders") then owning Securities shall have the option, exercisable by giving written notice of the exercise thereof to HoT ("Exit Notice"), to require HoT to exchange (each, an "Exchange") all or any portion of their Securities for cash equal to the aggregate Net Appraised Value of all Exchanging Stockholders' Securities subject to such Exit Notice; provided, however, that (a) the members of the Founding Group (and, in the case of the death of a Founding Group member, his representative) shall collectively be entitled to request not more than two Exchanges, and (b) immediately following the closing of, and after giving effect to, the first Exchange, HoT and its Affiliates (other than the Company) shall own either all of such Founding Group members' Securities or at least 80% of all outstanding Securities and 80% of all outstanding Securities having voting rights. Each Exit Notice shall be signed by all Founding Members (and, in the case of the death of a Founding Group member, his representative) and shall specify the number of Securities requested to be subject to the Exchange. 9.2. Exchange of Parent Stock. Notwithstanding anything herein to the contrary, with respect to any Exchange, at any time prior to the Exit Exchange Closing, Parent shall be entitled, at its option, to purchase from the Exchanging Stockholders all or any portion of the Securities subject to the applicable Exit Notice by giving written notice of the exercise thereof to HoT and the Exchanging Stockholders, which notice shall specify the value or number of Securities that Parent desires to purchase or number of shares of Parent Common Stock that Parent desires to deliver. Parent's obligation under this Section shall be satisfied by Parent delivering to each Exchanging Stockholder at the Exit Exchange Closing that number of fully paid and non-assessable shares of Parent Common Stock equal to the quotient of (a) the Exchange Percentage of the Net Appraised Value of the Securities of such Exchanging Stockholder, divided by (b) the Average Trading Price. No fractional shares shall be issued by reason of an Exchange. All calculations of the number of shares of Parent Common Stock to be issued to each Exchanging Stockholder shall be rounded to the nearest whole share. Upon exercise by Parent of the right to acquire the Exchanging Stockholders' Securities pursuant to this Section 9.2, the amount of cash to be paid by HoT at the Exit Exchange Closing pursuant to Sections 9.1 and 9.3 shall be deemed to be reduced by an amount equal to the Exchange Percentage of the Net Appraised Value. 19 9.3. Closing. The closing of an Exchange (the "Exit Exchange Closing") shall take place at the Company's principal executive offices on a date mutually acceptable to HoT and the Exchanging Stockholders but in any event not later than the 180th day following the date of receipt of the Exit Notice by HoT (or if such date is a Saturday, Sunday or legal holiday in the state where such offices are located, the first day thereafter that is not a Saturday, Sunday or legal holiday); provided, however, that if a Person whose Securities are subject to an Exchange is deceased or mentally incompetent, the Exit Exchange Closing shall be delayed as long as is necessary to allow the legal representative, executor or administrator of the Person whose Securities are to be exchanged to qualify properly as such in order that such legal representative, executor or administrator shall have all necessary authority to convey such Securities. At the Exit Exchange Closing, HoT shall deliver to each Exchanging Stockholder the cash calculated pursuant to Section 9.1 and Parent shall deliver to each Exchanging Stockholder the number of shares of Parent Common Stock to be delivered to such Exchanging Stockholder as determined pursuant to Section 9.2, which, in the aggregate, shall be equal to the aggregate Net Appraised Value of all Exchanging Stockholders' Securities subject to the Exit Notice. The parties shall take all action necessary to convey such Securities to be transferred in accordance with this Agreement, free of all liens and encumbrances (other than as set forth in this Stockholders Agreement and, with respect to the members of the Founding Group, the lien granted to HoT pursuant to the Founding Group Pledge Agreements), all as reasonably determined by the Company. Any amounts owing by the Exchanging Stockholder to HoT or the Company and deducted from the determination of cash or in determining the number of shares of Parent Common Stock to be delivered to a Stockholder upon an Exchange in accordance with this Article shall be deemed to be in satisfaction of the amounts owing by such Stockholder to HoT or the Company, as the case may be, and shall be paid to HoT or the Company, as applicable, at the Exit Exchange Closing. 9.4. Registration Statement. If, pursuant to an Exchange, Parent Common Stock is issued to Exchanging Stockholders: (a) On or before the expiration of 15 days following the Exit Exchange Closing, HoT shall use its reasonable efforts to prepare and file with the SEC a registration statement on Form S-3 (the "Registration Statement") for the shares of Parent Common Stock to be issued to the Exchanging Stockholders in accordance with Section 9.2 and will cause the Registration Statement to become effective at the earliest practical date after the Exit Exchange Closing. Each of HoT and the Exchanging Stockholders shall pay their own expenses incurred in connection with the Registration Statement, including, without limitation, the fees and disbursements of their respective counsel, accountants, and other representatives, except that HoT shall pay any printing, filing, and other fees and expenses incurred in connection therewith. The Exchanging Stockholders shall furnish all information concerning the Exchanging Stockholders as HoT may reasonably request in connection with such actions and the preparation of the Registration Statement. HoT shall maintain the effectiveness of the Registration Statement for the earliest of (i) two (2) years, (ii) when the shares of Parent Common Stock will no longer be considered "restricted stock" within the meaning of Rule 144 of the Securities Act, and when any restrictive legend can be removed, and (iii) once the Exchanging Stockholders sell all shares of Parent Common Stock to be issued to the Exchanging Stockholders and registered under the Registration Statement. HoT shall take any necessary actions under state "blue sky" laws consistent with federal registration. (b) HoT will cause the shares of its common stock included in the Registration Statement to qualify for quotation on Nasdaq. 20 (c) HoT shall notify the Exchanging Stockholders if HoT obtains actual knowledge of the happening of any event or the existence of any fact that would require the making of any changes in or amendments or supplements to the Registration Statement, any post-effective amendment thereto, the prospectus, any prospectus supplement or any document incorporated therein by reference so that, as of such date, the Registration Statement and the prospectus do not contain any untrue statement of a material fact and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in the light of the circumstances under which they were made) not misleading. With respect to the matters set forth in such notice, HoT shall, as promptly as reasonably practicable thereafter, prepare and file with the SEC and furnish a supplement or amendment to such prospectus or Registration Statement so that such prospectus or Registration Statement will not contain any untrue statement or a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each Exchanging Stockholder agrees that, upon receipt of any notice from HoT of the happening of any event of the kind described above, each Exchanging Stockholder will forthwith discontinue disposition of Parent Common Stock pursuant to the Registration Statement until such Exchanging Stockholder's receipt of the copies of the supplemented or amended prospectus, or until it is advised in writing by HoT that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus, and, if so directed by HoT, each Exchanging Stockholder will deliver to HoT (at HoT's expense) all copies, other than permanent file copies, then in such Exchanging Stockholder's possession of the prospectus covering such Parent Common Stock at the time of receipt of such notice. (d) Each Exchanging Stockholder shall notify HoT prior to effecting any sale of Parent Common Stock pursuant to the Registration Statement. 9.5. Termination. The rights and obligations of HoT and the other Stockholders under this Article shall terminate at such time as HoT and its Affiliates (other than the Company) own less than 50% of the issued and outstanding Common Stock. The rights of the members of the Founding Group under this Article are non-transferable except by reason of death and may only be exercised by the members of the Founding Group and, in the case of the death of such member, his representative. If a member of the Founding Group or, in the case of the death of such member, his representative, ever ceases to be the owner of Securities prior to the Exit Exchange Closing, the rights of such member or representative and the obligations of HoT with respect to such member shall cease with respect to this Article. 10. PREEMPTIVE RIGHTS. 10.1. Grant of Right. The Company hereby grants to each Stockholder the preemptive right to purchase up to such Stockholder's Preemptive Share of any New Securities which the Company may, from time to time, propose to sell or issue. 10.2. Exercise of Right. In the event the Company proposes to undertake an issuance or sale of New Securities, it will give each Stockholder written notice of its intention, describing the type of New Securities, and the price and the general terms upon which the Company proposes to issue or sell the same. Each Stockholder will have 30 days from the date such notice is given to give the Company written notice of such Stockholder's election to purchase all or any portion of the Stockholder's Preemptive Share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased; provided, however, that if the price so specified is payable in whole or in part in property (which term shall include the securities of any other issuer) other than cash, then 21 Stockholders who desire to exercise their preemptive rights shall pay cash, in lieu of such property, at the fair market value of such property as determined by the Company's board of directors in good faith. Any Stockholder who does not give such notice within such 30-day period shall be deemed to have waived his or its preemptive rights with respect to such New Securities, provided the Company consummates the issuance thereof within 120 days after the expiration of such 30-day period at a price equal to or higher than the price specified in the notice given to the Stockholders by the Company under this Section. 10.3. Termination. Notwithstanding the foregoing provisions of this Article, this Article shall terminate at such time as (a) no member of the Founding Group owns any Securities and (b) neither HoT nor any of its Affiliates owns any Securities. 11. VOTING AGREEMENT. 11.1. Board of Directors. Each Stockholder agrees that such Stockholder shall vote all Securities having voting rights now or hereafter owned by such Stockholder at any meeting of Stockholders of the Company and in whatever other manner is necessary to ensure that (a) prior to the occurrence of a Triggering Event, the board of directors of the Company shall at all times consist of four members, two of whom shall be designees of HoT and two of whom shall be designees of the Founding Group and (b) from and after the occurrence of a Triggering Event, the board of directors of the Company shall at all times consist of five members, three of whom shall be designees of HoT and two of whom shall be designated by the Founding Group. If any member of the Founding Group who is or becomes an employee of the Company or HoT, or any of their respective Affiliates, shall voluntarily cease to be an employee of the Company or HoT, or any Affiliate (other than for "Good Reason") or such Stockholder's employment is terminated "for cause" (as each of those terms are defined in the respective employment agreements with such Stockholders), such former employee shall thereafter resign from and be ineligible to serve on the board of directors of the Company. For purposes hereof, the term "Triggering Event" shall mean the Company's failure to achieve two or more financial covenants set forth in Section 6.11 of the Loan Agreement in each month during any three consecutive months during the term of this Agreement. 11.2. Vacancies. In the event that any director (the "Withdrawing Director") designated by HoT or the Founding Group pursuant to Section 11.1 is unable to serve or, once having commenced serving, withdraws from (or otherwise ceases serving on) the board of directors of the Company, such Withdrawing Director's replacement (the "Substitute Director") on the board of directors of the Company shall be selected by the Stockholder designating such Withdrawing Director. Each of the Stockholders agrees to vote all Securities having voting rights now or hereafter owned by them for the election to the board of directors of the Company of such Substitute Director. 11.3. Board Committees. The Company hereby agrees that neither it nor its board of directors shall form, create or appoint any committee (including, without limitation, an executive committee) of its board of directors unless (a) prior to the occurrence of a Triggering Event, an equal number of HoT's and the Founding Group's respective designees on the Company's board of directors are appointed and maintained as members of such committee and (b) from and after the occurrence of a Triggering Event, a majority of the members appointed and maintained on such committee are HoT's designees on the Company's board of directors and at least one of the Founding Group's designees on the Company's board of directors is appointed and maintained as a member of such committee. 11.4. Stockholder Approval Required. Without limiting the other covenants and provisions hereof, each Stockholder covenants and agrees that it and the Company, except upon the prior written consent of each of (a) HoT and its Affiliates (other then the Company) then holding Securities having voting rights and (b) the 22 holders of a majority of all outstanding Securities having voting rights then held by all members of the Founding Group, shall not (and shall not cause any directors to): (a) Issue, agree to issue, reserve for issuance, or authorize the issuance of (i) any additional Securities, whether presently or hereafter authorized and whether authorized and unissued shares or treasury shares, (ii) any Security convertible into or exchangeable for any Securities, or (iii) any options, warrants or rights to acquire any Securities; provided, however, that this subsection shall not apply if HoT has determined in good faith that an additional cash investment is reasonably required by the Company and HoT is not obligated to loan such additional amounts to the Company pursuant to the Loan A Commitment (as defined in the Loan Agreement); (b) Cause the Company to be liquidated or dissolved except in connection with an Exit Transaction; (c) Cause the Company to be merged or consolidated with another corporation except in connection with an Exit Transaction; (d) Cause the sale, assignment, lease, or other disposal of all or substantially all of the assets of the Company except in connection with an Exit Transaction; (e) Cause the Company to move its offices from New York, New York; (f) Prior to a Triggering Event, appoint an executive committee or any other committee of the Board of Directors of the Company; (g) Make any material change in the nature of its business as carried out at the date hereof; (h) Except for the transactions contemplated by this Agreement and in connection with the Purchase Agreement and the Loan Agreement, enter into any transaction, including, without limitation, any loans or extensions of credit or royalty agreements, with any of its officers, directors or Affiliates, any officer or director of any of its Affiliates, or any Associate of any of its Affiliates, officers or directors; and (i) Declare or pay any dividends, purchase, redeem, retire, or otherwise acquire for value any of its Securities (or rights, options or warrants to purchase any of its Securities) now or hereafter outstanding, return any capital to its Stockholders, or make any distribution of assets on account of the Securities to its Stockholders, provided however, that nothing herein contained shall prevent the Company from purchasing any Securities of the Company pursuant to the terms hereof. 11.5. Amendment of Charter or Bylaws. The Articles of Incorporation and/or Bylaws of the Company may be amended and/or restated in accordance with the provisions thereof and in accordance with applicable law; provided, however, that any amendment to the Articles of Incorporation or Bylaws of the Company adversely affecting any member of the Founding Group or HoT or any of its Affiliates (other than the Company) must be consented to in writing by each such Stockholder adversely affected. 11.6. Approval Required of HoT. Without limiting the other covenants and provisions hereof, each Stockholder covenants and agrees that it and the Company, except upon the prior written consent of HoT and its Affiliates (other then the Company) then holding Securities having voting rights, shall not (and shall not cause any directors to): 23 (a) Cause the Company to make capital expenditures greater than $100,000 individually or greater than $300,000 in the aggregate during any fiscal year of the Company; (b) Cause the Company to make inventory purchases greater than $100,000 in respect of any new product; (c) After the incurrence of $100,000 of Media Expenditures per product, cause the Company to make any Media Expenditure with respect to any product, if at the date of the determination and after giving effect to such Media Expenditure, the Media Efficiency Ratio with respect to such product would at such date of determination be less than 1.80; (d) Cause the Company to make Print Media Expenditures greater than (i) $50,000 in any month during the Company's fiscal year 2000 or (ii) $75,000 in any month during the Company's fiscal year 2001; or (e) Make any payments or distributions of any nature whatsoever to, or incur any indebtedness, directly or indirectly, in respect of, any member of the Founding Group or any of its Affiliates and Related Persons (as defined in the Purchase Agreement) except for payments of (i) salary and benefits as provided in the Employment Agreements dated the date hereof between Company and Sivan and Ramchandani and (ii) reimbursement of travel and entertainment expenses incurred on behalf of the Company and in accordance with travel and entertainment policies of the Company. 11.7. Termination. Notwithstanding the foregoing, the provisions of this Article shall terminate at such time as (a) members of the Founding Group collectively own less than 20% of all outstanding Securities having voting rights or (b) HoT and its Affiliates (other than the Company) own less than 20% of all outstanding Securities having voting rights. 12. OBLIGATION OF STOCKHOLDER'S SPOUSE. The spouse of each Stockholder joins in the execution of this Agreement to evidence his or her knowledge of its existence, and his or her acknowledgment that he or she agrees to the provisions of this Agreement, and that he or she desires to bind his or her interest, if any, in the Securities to the performance of this Agreement. Accordingly, each Stockholder's spouse agrees that in the event of his or her death or the death of the Stockholder, or upon the divorce of such spouse and such Stockholder, or the occurrence of any other event as herein provided, the covenants made in this Agreement shall be, and hereby are, accepted as binding on him or her individually and upon all Persons ever to claim under him or her. However, the foregoing is not intended to, and shall not be construed as, conferring or creating any interest in Securities in the spouse of any Stockholder. 13. FAILURE TO COMPLY. If any Disposition (other than a Permitted Disposition) is purported to be made or suffered without the giving of the Disposition Notice required by this Agreement or complying with Article 5, such purported Disposition shall be void ab initio and of no force and effect. However, without prejudice to the rights of the Company and the other Stockholders to treat such Disposition as void, the Securities which are the subject of such purported Disposition shall be deemed to have been offered to, and an option to purchase such Securities shall be deemed to have been granted to, the Company and the Stockholders (other than the Stockholder making or suffering such Disposition) pursuant to this Agreement as of the date the Company first learns of such purported Disposition, and the Secretary of the Company shall forthwith notify all Stockholders of such Disposition and the date of such notice shall be deemed the date of the Company's receipt of the 24 applicable Disposition Notice or notice required by Article 5 and thereafter the provisions of Articles 2 and 3 or Article 5, as applicable, herein shall be fully effective as to such Securities as if such Disposition Notice or notice required by Article 5 had actually been delivered, provided that the Appraised Value shall be determined as if the Disposition Notice or notice required by Article 5 had been given on the date the purported Disposition was made or Buyout Event occurred or as if the Disposition Notice or notice required by Article 5 had been given on the date on which the Company learns of such Disposition, whichever determination results in a lower Appraised Value. In enforcing this provision, the Company may hold and refuse to transfer any Securities or any certificate therefor tendered to it for transfer in addition to, and without prejudice to, any and all other rights or remedies which may be available to it. 14. RIGHT OF OFFSET. Notwithstanding any other provisions of this Agreement, whenever the Company is to pay any sum to any Stockholder, any amounts that such Stockholder owes the Company may be deducted from that sum before payment. 15. TERMINATION. This Agreement shall automatically terminate upon the happening of any of the following events: (a) the voluntary or involuntary dissolution of the Company; (b) the elimination, by death, Disposition of Securities or otherwise, of all but one Person or entity as a Stockholder; (c) the mutual agreement of the Company and the vote of holders of at least 75% of all outstanding Securities having voting rights; provided, however, until the earliest of (i) the exercise of the Put right or Call right pursuant to Article 4 or the Exchange pursuant to Article 9, (ii) the last to expire of the periods set forth in Sections 4.1(a), 4.2(a) and 9.1(a), and (iii) the date that the members of the Founding Group or HoT and its Affiliates (other than the Company) no longer own any Securities, termination pursuant to this subsection shall also require the agreement of each of (A) HoT and its Affiliates (other than the Company) then holding Securities having voting rights and (B) members of the Founding Group then holding Securities having voting rights; or (d) The closing of a firm commitment, underwritten initial public offering of the Company's capital stock by the Company to the general public, pursuant to a registration statement that is declared effective under the Securities Act of 1933, as amended. 16. REPRESENTATION OF STOCKHOLDERS. Each Stockholder hereby represents and warrants to the Company and each other Stockholder that, as of the date of such Stockholder's execution of this Agreement, he is the record and beneficial owner of the Securities set forth immediately below the name of such Stockholder on the signature pages hereof, free and clear of all liens, claims, encumbrances and equities of every kind and character whatsoever other than, with respect to the members of the Founding Group, the pledge of such Persons' Securities to HoT as security for the indebtedness owed by such Person to HoT pursuant to the Founders Group Pledge Agreements. 17. LEGEND. Each Stockholder agrees that any certificates representing Securities shall be legended to assure the enforceability of this Agreement, by bearing the following legend on the reverse side of the certificate (as well as a reference in bold-face type to such legend on the face of the certificate): "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A STOCKHOLDERS AGREEMENT DATED MARCH 14, 2000, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT AS 25 THEREIN PROVIDED. THE STOCKHOLDERS AGREEMENT ALSO INCLUDES A VOTING AGREEMENT OF THE PARTIES THERETO. THE CORPORATION WILL FURNISH A COPY OF SUCH AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." 18. MISCELLANEOUS. 18.1. Captions; Arrangements; References. The headings, captions and arrangements used herein are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms hereof nor affect the meaning thereof. Whenever herein the singular number is used, the same shall include the plural where appropriate, and vice versa; and words of any gender herein shall include each other gender where appropriate. The words "herein," "hereof," and "hereunder," and other words of similar import refer to this Agreement as a whole and not to any particular part or subdivision hereof. Reference herein to "Articles" and "Sections" are to articles and sections of this Agreement. 18.2. Notices. All notices, requests, demands, claims and other communications hereunder will be in writing. All notices, requests, demands, claims, and other communications hereunder will be in writing and shall be deemed duly given (a) when sent if by confirmed facsimile; (b) the next business day if by overnight delivery; or (c) five business days after the date when sent if by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth on the signature pages of this Agreement (or at such other address as such party may designate by written notice to all other parties in accordance herewith). Any party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner provided in this Agreement. 18.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF TEXAS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF TEXAS EXCEPT TO THE EXTENT THE LAWS OF THE STATE OF NEVADA APPLY TO MATTERS OF CORPORATE GOVERNANCE OF THE COMPANY. Any legal action or proceeding with respect to this Agreement shall be brought in any Texas state or federal court sitting in El Paso County, Texas, and, by execution and delivery of this Agreement, the Company and each Stockholder hereby accepts for itself and in respect of his or its Securities, generally and unconditionally, the jurisdiction of the aforesaid courts. The Company and each Stockholder hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. 18.4. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and permitted assigns. This Agreement shall be binding upon and inure to the benefit of each other signatory hereto and his respective heirs, representatives, successors, and permitted assigns, and any receiver, trustee in bankruptcy or representative of the creditors of each such Person. Except as specifically permitted herein, no party hereto may assign his rights or obligations hereunder without the consent 26 of the Company and a majority of the shares of Common Stock then subject to this Agreement. Any assignment in violation of the foregoing shall be null and void. If a Stockholder ever ceases to be the owner of Securities, he shall have no rights hereunder unless and until he again becomes an owner of Securities (provided that the foregoing shall in no event affect the applicability of the provisions of this Agreement to the Disposition of Securities by such Stockholder). In the event HoT consummates a Disposition of all of its remaining Securities to a non-Affiliate of HoT in compliance with the terms and conditions hereof (including, without limitation, Article 4), all of HoT's duties and obligations hereunder shall, effective upon such consummation, terminate and be of no further force or effect; provided, however, that Article 4 and Article 9 herein shall continue to be enforceable by or against any such transferee. Parent shall be deemed to be an express third party beneficiary to this Agreement. 18.5. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 18.6. Amendments. This Agreement may be amended, at any time and from time to time in whole or in part, or terminated, only by an instrument in writing, duly executed by the Company and the vote of holders of at least 75% of all outstanding Securities having voting rights; provided, however, until the earliest of (ii) the closing of the Put or Call pursuant to Article 4 or the second Exchange pursuant to Article 9, (ii) the last to expire of the periods set forth in Sections 4.1(a), 4.2(a) and 9.1(a), and (iii) the date that the members of the Founding Group or HoT and its Affiliates (other than the Company) no longer own any Securities, any amendments to the provisions of Articles 4 and/or 9 shall require the mutual agreement of (A) HoT and its Affiliates (other than the Company) then holding Securities having voting rights and (B) members of the Founding Group then holding Securities having voting rights. 18.7. Multiple Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. It is not necessary that each Stockholder execute the same counterpart, so long as identical counterparts are executed by the Company and each Stockholder. 18.8. Execution of Documents. Whenever Securities are purchased pursuant to this Agreement, the seller or sellers and the buyer or buyers shall do all things and execute and deliver all documents and make all transfers as may be necessary to consummate such purchase in accordance with the applicable provisions of this Agreement. 18.9. Continuation of Rights. The failure or refusal of a party hereto to exercise any right granted in this Agreement with respect to any Securities shall not be deemed a waiver of the right to exercise future rights which may arise hereunder with respect to such Securities. 18.10. Enforcement. It is specifically agreed and understood that monetary damages would not adequately compensate the Company and the non-breaching Stockholders for the breach of this Agreement and this Agreement shall therefore be specifically enforceable, and any breach or threatened breach of this Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto 27 and his successors, heirs, representatives and assigns waive any claim or defense that there is an adequate remedy at law for such breach or threatened breach. 18.11. Costs. In the event attorneys' fees or other costs are incurred to secure performance of any of the obligations herein provided for, or to establish damages for the breach thereof, or to obtain any other appropriate relief, whether by way of prosecution or defense, the prevailing party or parties shall be entitled to recover reasonable attorneys' fees and costs incurred therein. 18.12. Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions, and understandings other than the Purchase Agreement, which shall continue in full force and effect. 18.13. Cumulative Rights. The rights of the Company under this Agreement are cumulative and in addition to all similar and other rights of the Company under other agreements with the Stockholders and others. 28 The parties have executed and delivered this Agreement as of the date indicated in the first sentence of this Agreement. COMPANY: TACTICA INTERNATIONAL, INC. By: ------------------------------------------------ Name: Avi Sivan Title: President Address: 350 Fifth Avenue New York, New York 10118 Attn: Mr. Avi Sivan, President Facsimile: (212) 967-7540 with a copy to: Helen of Troy, LLC c/o Helen of Troy Texas Corporation One Helen of Troy Plaza El Paso, Texas 79912 Attn: Chief Executive Officer Facsimile: (915) 225-8001 STOCKHOLDERS: HELEN OF TROY, LLC By: ------------------------------------------------ Name: Gerald J. Rubin Title: President and Chief Executive Officer Address: c/o Helen of Troy Texas Corporation One Helen of Troy Plaza El Paso, Texas 79912 Attn: Chief Executive Officer Facsimile: (915) 225-8001 29 --------------------------------------------------- Avi Sivan Address: 39 Windsor Road Great Neck, New York 11021 Facsimile: ----------------------------------------- --------------------------------------------------- Prem Ramchandani Address: 111 Barrow Street, 4A New York, New York 10014 Facsimile: ----------------------------------------- -------------------------------------------------- Avraham Ovadia Address: 190 Old Farm Sagaponack, New York 11962 Facsimile: ----------------------------------------- APA INTERNATIONAL, LLC By: ----------------------------------------------- Name: Prem Ramchandani Title: Member Address: c/o Tactica International, Inc. 350 Fifth Avenue New York, New York 10118 Attn: Mr. Avi Sivan, President Facsimile: (212) 967-7540 30 The spouse of each Stockholder who is not otherwise a party to this Agreement has executed this Agreement as of the date indicated below for the purposes of (a) indicating her understanding of and agreement with the provisions of this Agreement and (b) binding her interest, if any, in the Securities of such Stockholder to the provisions of this Agreement. Date: March __, 2000 ------------------------------------------ Regina Sivan, Spouse of Avi Sivan Date: March __, 2000 ------------------------------------------ Efrat Ginot, Spouse of Prem Ramchandani Date: March __, 2000 ------------------------------------------ Carla Ovadia, Spouse of Avraham Ovadia 31 EX-21 5 d97329exv21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Doing Name Incorporation Business as - ---- ------------- ----------- Helen of Troy (Far East) Limited Hong Kong Same Name Helen of Troy (Cayman) Limited Cayman Islands Same Name Helen of Troy International B.V. The Netherlands Same Name Helen of Troy Limited Barbados Same Name Helen of Troy Services Limited Hong Kong Same Name Helen of Troy Texas Corporation Texas Same Name Helen of Troy Nevada Corporation Nevada Same Name HOT Nevada Inc. Nevada Same Name Helen of Troy L.P. Texas Limited Partnership Same Name HOT International Marketing Limited Barbados Same Name HOT (UK) Limited United Kingdom Same Name Helen of Troy GmbH Germany Same Name Karina, Inc. New Jersey Same Name DCNL, Inc. Texas Same Name Helen of Troy Canada, Inc. Nevada Same Name Helen of Troy Limited Hong Kong Same Name Helen of Troy, LLC Nevada Same Name Tactica International, Inc. (55% ownership) Nevada Same Name Helen of Troy SARL France Same Name Fontelux Trading, S.A. Uruguay Same Name
1 EX-23 6 d97329exv23.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Helen of Troy Limited: We consent to incorporation by reference in the registration statements No. 33-75832, No. 333-11181, No. 333-67349 and No. 333-67369 on Form S-8, and the registration statements No. 333-65477 and No. 333-67293 on Form S-3, of Helen of Troy Limited of our report dated May 3, 2002, relating to the consolidated balance sheets of Helen of Troy Limited and subsidiaries as of February 28, 2002 and February 28, 2001, and the related consolidated statements of income, stockholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended February 28, 2002, which report appears in the February 28, 2002 annual report on Form 10-K of Helen of Troy Limited. KPMG LLP El Paso, Texas May 28, 2002 1 -----END PRIVACY-ENHANCED MESSAGE-----